A study on the ore grade, operating costs and investment value of iron ore miners amid China's "Dual Carbon" policy

• Main Author: YAO, Shunyi
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2022
• Subjects: iron ore; grade; investment value; "Dual Carbon" policy; Agribusiness; Asian Studies; Entrepreneurial and Small Business Operations; Environmental Studies
• Online Access: https://ink.library.smu.edu.sg/etd_coll/431; https://ink.library.smu.edu.sg/context/etd_coll/article/1436/viewcontent/GPBA_AY2017_PhD_Yao_Shunyi.pdf
• Institution: Singapore Management University

With the growing demand for steel in significant economies, iron ore remains a vital investment in the long run. Although many iron ore miners have recently generated significant returns for investors, some have not performed well financially. The existing literature does not provide an integrated theoretical framework to explain this problem. The study examines the mechanisms determining the investment value of iron ore miners when China establishes carbon peaking and carbon neutrality goals ("Dual Carbon" policy). Further, based on the findings, this study also proposes investment strategies for iron ore miners in the future, which also has a high practical value. With a case study approach, this study summarizes the theoretical logic of the impact of carbon emissions reduction on iron ore prices; using an interrupted time series analysis model, it discusses the implications of China's "Dual Carbon" policy on the price differentiation of different iron ore grades, and forecasts iron ore prices for the future. It analyzes in depth how iron ore grade affects firms' investment value regarding global carbon emission reductions and oligopolistic market structures using the case study method. Finally, it discusses selecting iron ore investment targets based on the previous analysis. The study found that: (1) high-grade iron ore can help reduce energy consumption and carbon emissions in the steel-making process. With China’s progress in promoting the "Dual Carbon" policy, the demand for high-grade iron ore continues to grow, resulting in a premium for high-grade ore and a discount for low-grade ore. (2) The investment value of iron ore miners is determined by the profit per ton of ore produced. Since grade has a significant impact on the premium/discount rate, revenue and cost of iron ore, the investment value of an iron ore miner is a function of the grade of the iron ore it produces. (3) At the low point of the price cycle, iron ore oligopolies squeeze out firms that produce low-grade iron ore at high operating costs through predatory pricing. Therefore, iron ore miners' investment value is determined by the difference in profit per ton from oligopolies. The findings of this study have important implications for the search for quality targets. First, in the coming period, the investment logic of iron ore miners has changed. Previously, investors purely emphasized cost leadership strategy and now tend to an overall cost leadership/differentiation strategy. Under the new investment logic, we must focus on operating cost, grade, and profit per ton determined by cost and grade. The target will only have investment value if its profit per ton is not at an extreme disadvantage compared to the oligopolies. Secondly, since oligopolies already monopolize most of high-grade mines in the world, the promotion of China's "Dual Carbon" policy will strengthen the power of oligopolies in the market. Third, counter-cyclical operation is an essential tool for long-term investment in the iron ore industry, and purchase should take place when the oligopoly's profit per ton is around 0. Fourth, the mining country will benefit from the beneficiation and processing of raw ore, which will increase employment and taxation, and will play a significant role in reducing carbon emissions, which will be a crucial factor for China's future international investments.