Case analysis 1 Essay Example

  • Category:
    Business
  • Document type:
    Case Study
  • Level:
    Undergraduate
  • Page:
    2
  • Words:
    1451

Case Analysis

QUESTION 1

The main implications of lower iron ore prices for the company in accordance with the article

A drop in the price of iron ore in the Australian market has direct consequences to the value of the stocks in the Australian mining stocks. If the prices of iron ore go down the value of the stocks in the Australian mining stock will also go down. There are other effects that a company is likely to face with a fall in the price of iron ore and some of these effects include a decrease in the company’s credibility especially if the fall in the prices of iron ore is progressive. Creditors will analyze the situation and will become hesitant to offer credits to the company because of the fall in prices which also means a drop in the company’s revenue and ability to pay out their debts.

The operations at an iron mining company are very expensive and the company will only get more credit if it has a substantial amount of money in their reserves but if the prices of iron ore are going down substantially then the creditors will hesitate to give them credit and they will have to rely on their reserves. This move will reduce their reserves and the operations of the iron mining company will be affected drastically.

Lower iron ore prices will also affect the end results of the company that is they will have an effect on the end year results of the company. Lower iron ore prices means that the end of the financial year results are also going to be lower thus discouraging the shareholders of the company among other stakeholders (Macro Associates, 2014).

QUESTION 2

Implications of lower iron ore prices on chief competitors of the Australian iron ore company especially competitors based overseas

There are many reasons that lead to a fall in the price of iron ore and sometimes the reasons may vary for iron ore mining companies that are based in different geographical regions such as Rio Tinto and Vale iron mining companies. Some of these reasons may include changes in economies of scale, high costs of production, and unfavorable trade data from other mining companies in other regions, inflexible terms of credit to the operations of an iron mining company and poor financing deals for the iron ore mining companies among others (Forbes, 2014).

However, economics have stated that companies that are in the market with the same products always affect each other’s operations with changes in the prices of the commodity that is if the prices of iron ore in Rio Tinto the demand of iron ore from Rio Tinto will increase significantly compared to the iron ore from Vale mining company. The law of demand states that a decrease in prices of a commodity will cause an increase in the demand of the commodity given that other factors are held constant, ceteris paribus. Therefore if the only change in the iron ore industry is a fall in the prices of iron ore then according to the economists the demand for iron ore from the company suffering a fall in the price of their products will increase compared to other players in the iron ore industry.

QUESTION 3

The board is aware that inflation in Australia is at the top of the Reserve Bank of Australia’s (RBA) preferred and has suspects that the RBA may increase in the cash rate to counteract inflationary pressure. Explain briefly how, through manipulation of deposits in the banking systems, the RBA influences the cash rate. Explain your answer using the relevant macroeconomic tools and models

The cash rate or commonly referred to as the official cash rate in Australia is the rate of interest that the central bank has determined for the loans they give to commercial banks. The cash rate has been used by many countries or economies to influence or manipulate the level of economic activities as well as the rate of inflation and this it achieves by controlling the money supply in the economy and also setting monetary rules and conditions in the financial markets.

Banks operates using deposits made by their clients whether in cash or using checks and the money is then given out as loans to individuals, firms or organizations and they charge interests on these loans. The interest rates they charge will determine how much money will be available in the economy at certain times. High interest rates means that people will save more money in banks and spend less making money supply less, this move causes a pressure in prices of goods and services causing them to decrease and therefore reducing inflation while the opposite that is a decrease in the interest rate will make people save less in banks therefore increasing money supply available in the economy which increases inflationary pressure in the economy leading to increase in prices of goods and services. Therefore the Reserve Bank of Australia influences the cash rate by influencing the monetary rules and conditions in financial markets or institutions (Campbell, 1997).

The bank can control inflation by increasing money supply which in turn increases aggregate demand causing inflation in the economy.

Case analysis 1

QUESTION 4

If the RBA implements a policy of increasing the cash rate as describes in Q3, what will be the likely impact of the RBA’s action on the value of the Australian dollar? Explain your answer using the relevant macroeconomic tools and models

Monetary policies such as an increase in the cash rate by the Reserve Bank of Australia (RBA) have a significant level of influence on the rate of inflation as well as level of economic growth which can be seen by the effects the changes have on the rate of the Australian dollar. When the cash rates are increased courtesy of changes in the monetary policies by the Reserve Bank of Australia then the value of the Australian dollar will also increase but this will only occur if the exchange rates in other countries remain unchanged.

The increase in the cash rate will be interpreted by other nations as an increase in the value of the Australian dollar making them invest more in the Australian market while attracting new investors. The increase in the Australian dollar will make the investors convert their currencies so as to enable them to invest in the Australian market and this will increase the amount of money supply available in the economy and in the long run cause a decrease in the prices of goods and services. If the money supply increases the Reserve Bank of Australia will be forced to increase the cash rate to attempt to reduce the amount of money supply in the economy thus inducing an increase in inflation (Reserve Bank of New Zealand, 2014).

QUESTION 5

The board wants to know how the Australian dollar impact you have outlined in Q4 might affect your company. What would you tell them?

An increase in the value of the Australian dollar will cause an increase in the number of investors in the country but they will be investing more in the money market instead of making investments in the iron ore industry. If the value of the stocks in the Australian mining stocks is still low when the value of the dollar increases investments will be made in the money markets but they will shy away from investing in the Australian mining stocks for the iron ore company (Nolan, 2007).

However, if the money supplies in the economy increases while the conditions in the other industries remains the same then there may be a chance for increased investments in the iron ore mining industry thus saving the operations for the company. The advice that will be best for the board of the Australian iron ore company will be to improve the quality of the iron ore mined and that will make it more competitive in the iron ore industry thus bringing back more investors in the company (Nolan, 2007).

Works Cited

Reserve Bank of New Zealand, (2014). Monetary Policy and Inflation. Retrieved on 24th august, 2014 from <
http://www.rbnz.govt.nz/challenge/resources/2970552.html>

Campbell, Frank. (1997). the Implementation of Monetary Policy: Domestic Market Operations.
Retrieved on 24th august, 2014 from http://www.rba.gov.au/mkt- operations/resources/implementation-mp.html

Macro Associates, (2014). S&P Mulls Iron Ore Miner Downgrades. Retrieved on 24th august, 2014 from http://www.macrobusiness.com.au/2014/07/sp-mulls-iron-ore-miner- downgrades/

Forbes, (2014). Cliffs’ Earnings Preview: Lower Iron Ore and Coal Prices Will Weigh on Results.
Retrieved on 24th August, 2014 from http://www.forbes.com/sites/greatspeculations/2014/07/21/cliffs-earnings-preview-lower- iron-ore-and-coal-prices-will-weigh-on-results/

Forbes, (2014). The Latest Iron Ore Price Slump: Causes and Effects.
Retrieved on 24th August, 2014 from http://www.forbes.com/sites/greatspeculations/2014/03/12/vale-stares-at-1- billion-investment-loss-if-guinea-panel-recommendation-implemented/

Nolan, Matt. (2007). Higher Interest Rates – Stronger Currency? Retrieved on 24th August, 2014 from http://tvhe.wordpress.com/2007/11/22/higher-interest-rates-stronger-currency/