South-Western College Publishing - Economics  
How Do Steelmakers Spell Relief? I-N-C-R-E-A-S-E S-U-P-P-L-Y
Topic Supply and Demand
Key Words iron ore, steel, price, demand, supply.
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Reference ID: A156734040

News Story Since 2000, the price of a metric ton of iron ore has almost tripled, from about $30 per metric ton to over $80. And there's no relief in sight for steelmakers, the users of the ore.

Demand continues to outpace supply, so much so that ore suppliers are pushing its mines as much as possible, and are expanding production as quickly as they can. Those firms are hiring up so much labor, though, to meet the production increase that shortages have occurred.

Steel firms have actually sought out the protection of the government. Indian firms are asking the government to limit the amount of exports of ore, leaving more for internal usage. The Chinese have made it more difficult for smaller steel firms in China to import the ore, making it easier for the larger firms to purchase.

Rio Tinto, one of the largest ore mining companies in the world, is expanding production as quickly as possible. It plans to double the amount of railroad tracks it has by the end of 2007 - making it the largest private railroad operator globally. And its costs are increasing. New locomotives for the increased rail network are behind schedule, and construction costs continue to increase. Further, production delays can be caused by having to apply for environmental permits. Such permits are being held up because there aren't enough people to help process them; they have left work to drive trucks for the mining companies.

At the same time that Rio Tinto spends all of this money, it is still looking in the long term for production increases. Once the increased production lines come online, they will then have to deal with the backlog, and then try to get ahead. Steel will remain expensive for some time to come.

Discussion Questions:
1. What would the impact of the Indian government's restriction on exportation of ore? Draw a graph of supply and demand for steel in your answer.
2. What does the article say about the opportunity cost of not working in the mining industry?
3. The mining firms are being forced to increase the amount of rail lines and locomotives to bring more iron ore to the steel firms. What does that activity itself do to the price of steel?
Multiple Choice/True False Questions:
1. According to the article, the price of iron ore is changing because
  1. Demand is rising faster than supply.
  2. Demand is falling faster than supply.
  3. Supply is rising faster than demand.
  4. Supply is falling faster than demand.
2. What does the article suggest will be the impact on the price of cars?
  1. Price of cars should increase.
  2. Price of cars should decrease.
  3. Price of cars should remain the same.
  4. Price of cars is not related to the price of iron ore.
3. What does the article suggest is happening to wages for mining labor?
  1. Wages are rising because demand for labor is rising.
  2. Wages are falling because demand for labor is falling.
  3. Wages are rising because demand for labor is falling.
  4. Wages are falling because demand for labor is rising.
Source "Shock and Ore." The Economist. January 4, 2007.
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