Iron ore prices and the value of the Australian dollar

Abstract

Continued strong Chinese demand for Australia's iron ore has ensured that this commodity is singularly the highest value-ranking, exported mineral commodity for this country. As a consequence, the iron ore price and the value of the Australian dollar have substantial influences on the Australian economy. In this empirical study, the aim is to investigate the long-term relationship and the strength of association between iron ore prices and the corresponding exchange rate (AUD/USD). Several assessments for unit root tests have been performed to examine whether the time series data are stationary or not, and the assessments have revealed that the results from all of the tests have confirmed both the iron ore prices and the AUD/USD exchange rates data are non-stationary in levels and stationary in first differences, being I(1) stationary. Johansen cointegration tests have been performed for examining the cointegrating relationships, and have exposed the evidence in favour of a long-term relationship between iron ore prices and the AUD/USD exchange rate. Furthermore, the stability of the relationship has been presented and, thereafter, examined the Granger causality through a vector error correction model (VECM) and a vector auto regression (VAR) test, respectively. From the Granger causality test, it is apparent that there is a one-directional causality between iron ore prices and the AUD/USD exchange rate, implying that iron ore prices generate Granger causes to the AUD/USD exchange rates whereas, conversely, the exchange rate does not have significant Granger causes on iron ore prices. However, while the structural vector auto regression (SVAR) is considered, interestingly, the impulse-response functions (IRFs) analysis revealed that owing to the shocks on AUD/USD exchange rates, iron ore prices have significant responses too, and vice versa.

The Mechanism of Imported Iron Ore Price in China

“…Haque et al [13] consider a Vector Error Correction Model (VECM) between the exchange rate AUD/USD and iron ore price, and they find out that AUD/USD has no Granger-causality to iron ore price and iron ore price has Granger-causality to AUD/USD, however, they find that in the Impulse Response Function (IRF) graph, AUD/USD has impact on the price of iron ore. Wårell [14] also uses VECM approach to analyze the iron ore market. This paper uses monthly iron ore price from January 2003 to August 2012 and includes GDP growth in China and freight rates, and it shows that they are cointegrated.…”

“…Also, according to Haque et al [13], exchange rate may have influence on iron ore price since iron ore is usually settled by US dollar, when the producers and is a measurement of freight of bulk cargo. Therefore, to capture the fluctuation of freight, BDI should be considered.…”

Analysis of the Energy Efficiency of Diesel Oil Consumption in the Brazilian Iron Ore Mining Company

“…As Australia and Brazil export more iron ore to China, these countries have reduced their exports to other countries, such as USA, Germany and France [27]. In addition, some exporting countries, such as Brazil, rely heavily on the commodity exports [28].…”

Market risk factors analysis for an international mining company. Multi-dimensional, heavy-tailed-based modelling

“…This approach is, for instance, demonstrated in [18][19][20], where the similarity between the price movements for different commodities was discussed. The econometric-based methods were also proposed in [21,22].…”

“…The most classical multi-dimensional time series is the class of vector autoregressive (VAR) models. We refer the readers to the bibliography positions [37][38][39], where the multi-dimensional modelling of commodity prices and financial markets in the USA and India is considered, respectively.…”