Table of Contents
1.0 Introduction …………………………………………………………………………………………………………… 1
1.1 Article Summary ………………………………………………………………………………………… 1
1.2 Essay Overview ……………………………………………………………………………………………2
2.0 Article Analysis …………………………………………………………………………………………………….... 2
2.1 Demand and Supply of Steel in China …………………………………………………………. 2
2.2 Market efficiency ………………………………………………………………………………………… 3
2.3 Market Equilibrium ……………………………………………………………………………………. 3
2.4 Elasticity and total revenue ………………………………………………………………………… 4
3.0 Conclusions ………………………………………………………………………………………………………….
4.0 References …………………………………………………………………………………………………………... 1.0 Introduction 1.1 Article Summary
The article “What Could Impact Chinese Steel Prices in 2017?” by Annie Gilroy, highlights the
factors that may influence the steel prices in China for this year 2017. China are the largest
producers of steel, It’s crucial to examine the steel prices of China. The article also details
the causes behind the steel prices and describes the various impacts it places on the mining
companies.
1.2 Essay summary
This paper will employ microeconomic principles to the notions examined in this article to
assist in explaining the circumstances occurring in the Chinese steel market. The initial
principle evident throughout this article is demand and supply. This concept will be
examined in how they influence each other to arrive at the equilibrium. Secondly, the
principle known as market efficiency will be discussed and will analyse how consumer and
producer are impacted by alterations in price. The concluding concept to be discussed is
market equilibrium and how market forces work to clear shortages. Theories examined in this essay:
- Demand and supply
- Market efficiency
- Elasticity and total revenue 2.0 Article Analysis
2.1 Demand and supply
Law of demand refers to the activities of consumers in regard to their purchasing tendencies.
Demand is the correlation between the price of a commodity and the quantity demanded of
that product. We use the demand curve to exemplify this relationship with every other
variable held constant. The law of demand states that when we increase the price of a
commodity, the quantity demanded will decrease and vice-versa. This highlights a negative
relationship between the price and quantity demanded, causing a downward sloping curve.
(Econs 1000 2015)
The factors that influence demand other than a change in price, are non-price factors. These
variables include of seasonal considerations, government interventions, consumer tastes,
consumer’s income, consumer’s knowledge of future prices. (college Accounting Coach
2009)
In this article government interventions are a prominent factor that affects the demand and
supply curve. When the government creates policies that promote the suppliers work
environment, this leads to higher expected production. At the same when the policies
introduced promotes the country’s economy, consumers are enabled to purchase more
increasing demand. To exemplify, with the China steel industry in 2016 the government
expanded the stimulus measure, expanded the credit in the sector and relaxed property
policies which increased the support demand for construction. (Roberts 2016) The suppliers
were able to produce more and the demand for steel was high.
Seasonal considerations also affect product demand. That is during some seasons the
activities can be slow or be higher than during the other seasons. As mentioned, in China the
construction activities are fewer during the summer times. It’s worth noting that China has
resolved to improve its domestic market and minimise the international exports. Therefore,
during the summer time, the demand for steel is expected to decrease. This would also
impact the suppliers as they would be forced to lower prices to entice more consumers
causing a left move of the supply curve.
Consumer income is also a major variable in the demand of commodities. If there is an
expectation of consumer increase, then the demand for the products will increase. As the real estate industry in china is not increasing then the demand is expected to be low.
However, if at one point the income of the consumer changes due to the changes in the
state trade then the demand curve will shift, increasing consumer purchasing power which
will in turn lead to more production of the commodities as the suppliers work to satisfy the
market.
In the recent year China have resolved to rely on the domestic market for steel reducing
their exports as they respond to overcapacity issues. One thing that will influence the
domestic demand in China is its population. It’s expected that the urban population of China
will increase to 600 million by 20130 from the current 400 million (Ash & Holbig 2013). For
this reason, the steel consumption is expected to increase as a result of urbanisation. This
would mean more production by suppliers and increase in demand by the consumers. We use the supply curve diagram to illustrate the relationship between the price of a good
and the quantity of that particular good supplied. (Brennan 2015). Making sure all other
variables held constant, the law of supply claims that when the price of a commodity rises
the quantity supplied will increase. This will visually depict a positive correlation between
the cost and quantity supplied forming the supply curve to sloping upwards. The variables other than price of a product causing a shift in the supply curve include of
price of inputs, technological change, price of substitutes in production, number of firms in
the market, and expected future prices. (introductory economics 2015)
As evident in this article the cost of production which may include the cost of raw materials
and the compliance costs impacts the supply of goods. When the cost productions increases
considering the prices remain constant then the margins of the profit will decrease. A rise in
production cost will create a decrease in the supply causing the supply curve to shift the left
as the product becomes less profitable. Iron core and coking coal accounts for 29% and 25%
of the final steel cost with other including electricity, labour and capital charges gold. For
2017 the cost of steel is expected to drop due to a prolonged oversupply of iron ore in the
market which will enable the consumers to purchase steel at lower prices resulting in
increased supply. While this can increase the supply of steel the compliance costs increase
due to pollution created by steel dumping can lead to reduction of supply causing a shift of
the supply curve to the left.
Furthermore, the future expectations by the producers affect at a greater height the supply
of the products. In china for example, the expected continued cuts in the production of steel
as a result of environmental damages which has raised issues on future supply levels causing
a shift on the supply curve due to a fall in production levels. Such expectations affects the
production of suppliers which leads to increase in price as they try to increase revenue
which in turn leads to slow demand by the consumers. Elasticity and total revenue
Price elasticity of demand (PEd) is the measure of the connection between the difference in
quantity demanded of a product and a change in it its cost.
The following formula is used to calculate the PEd (INVESTOPEDIA)
Mid-point formula:
(Q 2−Q 1) ( P 2−P 1)
÷
Q 1+Q2
P 1+ P 2
2
2
Computing the PEd results in a coefficient that may be used to demonstrate the degree of
responsiveness. If demand is elastic, the PEd is greater than 1. Similarly, if the PEd is smaller
than 1 the demand is inelastic. Lastly, demand is unitary elastic if PEd is equal to 1.
(Economics 1000 2015)
The most fundamental area for a firm is the pricing of the products. To avoid any losses and
maximise output gains, the firms must consider the gains that can be realised including the
loss as a result of changes in price. Economically, the goal of a firm is to maximise profit
which doesn’t necessarily translate to maximising revenue. The relationship between the
price and revenue is therefore a starting point in indicating whether increasing or decreasing
prices is sensible.
The article explains that the China steel industry can undergo two effects with the price
changes. If the demand remains constant and the price continues to increase, then the total
revenue will rise. However, they can also experience a quantity effect, when the consumers
fail to purchase the steel on the new increased prices reducing total revenue.
In 2016, the price of steel was $3557 per ton and in 2017 the price is anticipated to raise by
17% which is $4161 per ton. The demand for steel in 2016 was 681 million while in 2017 the
quantity demanded is expected to decrease to 667.4 million as a result of various factors. Mid-point Formula
(Q 2−Q 1) ( P 2−P 1)
÷
Q 1+Q2
P 1+ P 2
2
2 = Market efficiency
This concept argues that a planned investment approach cannot be successful in a market as
prices are unpredictable and random (Fama 1991). An efficient market is one where the
market prices do not unbiasedly estimate the true value of the investment which does not
require the price in the market to equal the value at all points from this analysis then it
follows that investors cannot find the value of stocks at any point using the investment
strategy.
Consumer surplus is the measure of the economic benefit the consumers receives from
consuming products, which is the difference between the amount customers are willing to
pay and have the ability to pay for a product. (Econs 1000 – page 122). Consumer surplus
level changes as the market price of the good changes. For example, the supply cost may rise
resulting to market price rise and hence a consumer surplus fall. Assuming the demand
doesn’t shift then increase in price will reduce the consumer surplus, also assume that the
prices fall below the equilibrium then the products will get less profitable for producers.
While consumers would want to buy more price decreases, they will not be able to since the
manufacturer will reduce the produce leading to shortages in the market creating a wide
loss of efficiency.
Producer surplus is the additional benefits that the producers get in terms of profit, when
the market price is higher than the minimum amount they are ready to supply their products
for sale. An alteration in price influences producer surplus. When the price decreases the
producer surplus decreases including the level of goods supplied, this can be as a result of
low supply cost, at the same time when the market price increases due to the increase in the
market demand the producer surplus increases.
These concepts are significant in the market, particularly when evaluating the impacts of
numerous government interventions. Changes in the market conditions of supply and
demand in the market causes a change in the level of market welfare. In terms of this
industry they experienced steel production increases in 2016 by 3.6% despite receiving
pressure from the dumping restrictions and the price increases. (Thulare 2016) The
government responded by providing stimulus which assisted in restocking and cutting of a
significant amount of capacity creating a market efficiency. With the pressure of curbing
production and the prices raising to over 60% in 2017 due to increases in the prices of cost
of raw materials of on equity to 12 will be realised by 2020. Conclusions
The Chinese steel market References

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