The Effect of Price Risk on Mongolian Copper Exports

Abstract

Mongolia has copious mineral deposits. Copper ore is the major commodity of the mineral industry and is also Mongolia’s main export item. China is the largest destination for Mongolia’s copper exports. To analyze the price risk effects on Mongolia’s export and the import demand of China, the differential import allocation model is applied to estimate the import demand of China. The model data for China’s imports of copper come from Mongolia, Peru, Chile, Australia, and the rest of the world (ROW). The results show Chile is the only exporter that would be affected by its own price risk. Chile’s import would increase by 5.76 percent when the price risk increases by 1 percent. The risk premium of Chile indicates that to maintain a constant import quantity, the price would increase 1.39 percent following a price risk increase of 1 percent. Changes in Peru’s and Chile’s pricing and the price volatility of Chile have positive effects on Mongolia’s copper exports. China’s demand for copper from Mongolia differs from its demand for copper from other sources in that it is price inelastic. One implication of a price inelastic demand is that Mongolia could improve its national welfare by imposing an export tax on copper destined for China. The tax would be welfare decreasing for Mongolia’s copper producers, but because most of the tax would be borne by Chinese consumers, the government could use the tax revenue to compensate domestic producers for their losses and still have money left over to fund public works such as grassland protection.