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EVE Online: Economy Dev Blog E-mail
Tuesday, 04 September 2007
Eyjo “DrEyjoG” Gudmundsson, the economist hired by CCP to study and consult about the EVE Online economic system, has published his first personal Dev Blog. The article is mainly related to the mineral market, and shows how  the mineral prices dropped during these three years, causing an increase in trade amounts.



An overview of the mineral market in EVE Online

Introduction

This is the first Econ Dev blog on the economics of EVE. We are heading into unknown territory since there exists no standardized measures on how to describe and analyze an online universe, or if indeed there is a need to have new tools to describe virtual reality. Trade and industrial activities are an important part of EVE and therefore descriptive analysis of trend in quantity traded, price fluctuations and regional differences are always of interest to those participating in that business. In order to fulfill the expectations of pilots we need your comments on this dev blog and which parts are most interesting. Selected sections of this dev blog could be updated on a regular basis if the demand is there.

Minerals are the basis of everything in EVE. Most things built in EVE require one or more minerals; some easy to get, others not so much. Minerals provide income for professional miners and newbies alike and no war can be won without having a good supply with which to build and equip an armada. The constant demand for minerals makes the market one of the most effective in the EVE Universe with huge volumes and thousands of trades on a daily basis. That is why examining the mineral market in some depth has been chosen as the topic for the first Econ Dev Blog (EDB).

Historical overview

When referring to the mineral market we refer to all trade of minerals through the market system of EVE Online. This does not take into account trade through the contract system or direct transactions between pilots. On all commodities market throughout history only a fraction of the traded volume actually goes through central auction markets. The majority of trade in commodities and other goods is most often a transaction between two entities but the price is based on the price at the open exchange.

As the EVE universe has expanded, so has the market for minerals. EVE Online's population has increased by 0.9% per week since launch, currently residing at 190.000 paid subscriptions and nearly 40.000 active trial accounts which are disregarded from these economic studies. The first graph shows how trade with minerals increased slowly for the first years but after mid-year 2005 the value of trade increased exponentially. This increase coincides with a rapid increase in the population as well as introduction of new mining technology which resulted in significantly higher mining productivity.

Figure 1. Total weekly trade value of all minerals (right axis) and total population at the end of each week (left axis). This graph shows the explosion in trade activity with minerals, starting in the third quarter of 2005 and continuing to date, coinciding with then accelerating beyond the population growth rate.

Total trade in minerals amounted to 1.6 trillion ISK (1600 billion ISK) on a weekly basis at the end of June 2007. That was a nearly 100% increase in weekly trade value compared to end of June 2006 and almost an eight-fold increase from June 2005. At the same time the population in EVE grew by 36%. Hence, trade in minerals is increasing at a higher rate than population itself. The faster increase in mining trade value is an indicator which shows that not only is the population of EVE rising but also that economic activity within EVE is rising. Trade volume increased at a slightly higher pace than trade value. The graph below shows that weekly trade volume increased from 10 billion units in 2003 to 120 billion units at the end of June 2006, or a twelve-fold increase. This increase is about 1.29% increase on a weekly basis, compared to an increase of 0.9% in total trade value. In order to examine the mineral market in more details and for further analysis in the future, it is useful to distinguish between high-end and low end minerals. High-end minerals can be mined in low sec and zero-zero space only but low end minerals can be mined in all regions, including Empire Space.

The low end minerals are tritanium, isogen, mexallon and pyerite. The high end minerals are megacyte, morphite, nocxium and zydrine.

Figure 2. Total weekly trade quantity (items) of all minerals (right axis) and total population at the end of each week (left axis). This graph shows the explosion in trade activity with minerals starting in the third quarter of 2005. Traded quantity increases somewhat at a slower rate after midyear 2006 but still continues to grow until the second quarter of 2007 when there is a sharp decline in traded quantity.

Examining the details of the graph reveal an increase in trade volume starting in early third quarter of 2005. This coincides with the introduction of new mining technologies (mining barges) which increased mining productivity. The weekly production increased from around 20 billion units up to 60 billion units between the third quarter of 2005 and beginning of the second quarter in 2006. The increase in weekly production rate during that time was 3.7% on the average compared to the overall average growth of 1.29%. After midyear 2006 the increase in traded volume is at a slower pace than previously but the total volume still doubles from midyear 2006 until mid year 2007. To examine the increase in trade volume and value further a per capita index was constructed for both variables.

Figure 3. Trade value and traded quantity per capita from October 2003 until December 2007. Total traded value is rising more than the traded quantity. This could indicate that either there is inflation in mineral prices or that there is a change in the composition of minerals traded.

Looking at the increase in trade volume and trade value per capita reveals how trade value per capita is rising faster than trade volume. There can be two reasons for this difference; an indication that overall prices are increasing (i.e. inflation) or a change in the composition of trade between low-end and high-end minerals. Hence we turn to the composition of the trade volume. Tritanium is the most traded mineral both in terms of items and total number of orders but in terms of value Zydrine has the highest market share. Since the dawning of New Eden the share of tritanium has been around 60% to 70%, with pyerite in second place with about 20% and other minerals with less than 10% of total traded quantity (see figures 4a – 4d).

Nocxium has the largest share for total traded quantity for high-end minerals, followed by zydrine, megacyte and then the rarest of it all; morphite. In terms of trade value for high-end minerals it is zydrine reigns supreme while low-end tritanium holds the largest share in terms of quantity. However in terms of trade value tritanium and pyerite hold similar share. It is interesting to note that in recent months mexallon and pyerite have increased as a share of total trade (and in absolute terms as well). Mexallon and pyerite are now about 50% of trade in low-end minerals, up from about 30% just two years ago.

Figure 4 shows the share of high-end mineral traded quantity has been relatively stable but the recent price changes in zydrine have decreased its share in total value. The change for the low-end minerals is quite interesting. Tritanium has been dominating the traded quantity but in the last year the increase in pyerite prices has increased its share considerably in the total trade value.


Figure 4. Four graphs showing the share in value and traded quantity for high-end and low-end minerals using daily trade quantities and daily average price. For high-end minerals nocxium is largest in quantity but zydrine is highest in terms of value. For the low-end minerals Tritanium is largest in quantity but all four are similar in terms of share of total trade value in low-end minerals

This might explain why trade value per capita is increasing while traded quantity is relatively stable during that time period (see figure 3). Both tritanium and pyerite have increased in value over the past twelve month signaling an increased demand for these low-end minerals. We have not been able to pinpoint why this increase seems to be occurring. The current hypothesis is that increased demand for capital type ships and the rise in warfare over the past few months has increased demand for low-end minerals (they are needed in huge quantities for production of capital ships) at the same time that corps and alliances have been withholding minerals from the market for their own production. It would be interesting to hear the community's hypotheses concerning the increasing low-end mineral demand.

Summarizing the historical overview gives us an interesting picture of how markets work in EVE Online. In the past four years trade in minerals has increased eight to twelve times. The increase has accelerated in the past two years with total trade value per capita increasing faster than trade volume. This overall trend shows how the increase of the population, better mining technology and increased mining skills have helped in making the mineral market the most active market in EVE. However, the market for minerals is not a simple single market. Due to how ore types are asymmetrically distributed throughout EVE, there are great regional differences in demand and supply for the different minerals mined from different ore types. Long hauling distances, asymmetric information on trade between regions and the risk involved in hauling valuables from low sec and zero-zero space are all factors which make mineral trading profitable. We will now look at the mineral market in more details focusing on price changes on the mineral market as well as examining individual mineral markets in depth.

Price index for minerals

In order to be able to measure general price changes in mineral price a Paasche price index for minerals was constructed. The price index measures the relative price change based on a basket of minerals. The basket is the average quantity traded for the last 180 days, hence the index reflects how much the price of the basket of minerals has changed over time. The index is shown in the graph below.

Figure 5. The Mineral Price Index (MPI) from October 2003 through June 2007. The graph shows the price level over time compared to current prices and traded quantity. The graph shows how prices have stabilized over time and the overall decline of mineral prices over time.

In December 2003 to the end of first quarter in 2004there were big price increases followed by period of large fluctuations. The price seems to stabilize in the end of the second quarter in 2004, increased throughout the third quarter then started another decline. Over the next 18 months price fluctuated with short periods of high inflation in mineral prices followed by periods of deflation. The overall trend from early 2005 until end of the second quarter in 2007 is one of price decreases with prices falling considerably in the fourth quarter of 2006, due to the discovery of new drone regions. After the drone regions where discovered an increased supply of zydrine and other high-end minerals started to flood the market. This resulted in a decrease in the price of zydrine and despite the price increases in the second quarter of 2007 the overall price index of minerals is at its lowest level since early December 2003.

This price index can be used to measure the inflation/deflation in mineral prices, but it DOES NOT measure the overall inflation in EVE (more on that in the Quarterly Newsletter in October).

Looking at changes in the price index reveals several periods of high inflation followed by periods of price stability and then price deflation.

Figure 6. Changes in the Mineral Price Index (MPI) from October 2003 through June 2007 measuring inflation/deflation in mineral prices. The graph clearly shows how fluctuation in mineral prices have been declining over time except during the turmoil of the high-end mineral market in the first and second quarter of 2007.

The first few months of operation show a monthly inflation of up to 70% followed by a sharp decline in inflation, turning to a deflation of 60%. From the second quarter of 2004 the changes are less volatile though at times changing by +/- 20%. In the first three quarters of 2006 prices are very stable with inflation in mineral prices measuring in the range of +/- 2% per month. However, the introduction of new drone regions and resulting increased supply of high-end minerals caused prices to drop by almost 20% per month in the fourth quarter of 2006 and the first quarter of 2007. The decline decelerated somewhat in the second quarter of 2007 and with the introduction of new composition of minerals from reprocessing alloys price started to increase again. In the beginning of the third quarter of 2007 inflation in mineral prices measures at about 15% per month but has been gradually declining throughout the quarter and is expected to go below 5% towards the end of the third quarter in 2007.

Though the overall price index of minerals has declined over the past two years the story is quite different for individual minerals and market areas. In the next section we will focus on analyzing the different regional markets.

Price of minerals and regional differences

EVE consists of more than 5000 solar systems in 64 regions. The solar systems are connected in a complex web allowing for goods to be moved from one end in the Universe to another. Pilots have to be careful because in low sec and zero-zero security zones there is always the danger of being attacked by gangs of pirates looking for easy prey. It is therefore no surprise to see the regions with the highest quantity of mineral trade are in the central regions of Empire space.

Figure 7. Total traded quantity within regions of all minerals – top 10 regions. The graph shows the top 5 regions have about 50% of the total quantity and The Forge region, with Jita as the prime market hub, holds the largest share for a single region.

Figure 7 shows the quantity traded in the top ten regions and all other regions. The top ten regions have about 80% of total quantity traded with the top 5 holding 50% in June 2007 and have increased their share by 10 percentage points since October 2003. Currently the Forge (Jita) is the single largest region with more than 12% of the total quantity traded but Heimatar follows with 11%. Other regions have less than 10%, but The Citadel and Lonetrek are both over 9%. It is well known that Jita is the main market hub in EVE but the share size of the other regions is surprisingly high. We expect to see further concentration in trade regions in the future with the top 10 regions having more than 60% of the total trade value in a few months time.

Now turning to the price of individual minerals. Visual examination of price indices for individual minerals shows periods of common changes in the price for some minerals and then at other times prices seem to be going in the opposite direction. It is especially interesting to see the price changes in the low-end minerals tritanium and isogen. Both increased considerably in the first two years, or until the second quarter of 2005. After that prices for tritanium dropped sharply while prices of isogen decreased more gradually. The price decline of isogen continued over the next two years and is still declining while prices of tritanium have recovered to former levels. For the high-end minerals the story is quite different. Zydrine pricing had been relatively stable until the new drone regions opened up. There was a sharp decline in prices followed by a sharp increase in the beginning of the third quarter in 2007. At the same time prices for megacyte have been stable after a larger than 50% price drop in the early years.

Figure 8. Price indices for individual minerals. This graphs shows well how individual mineral markets have developed over time.

The most interesting period to look at is the period from the fourth quarter in 2006 through the beginning of the third quarter in 2007. At the end of November 2006 new regions where discovered and allowed pilots to gather high-end minerals in a more efficient manner than before through reprocessing of alloys dropped by drones. This lead to an increase in zydrine on the market, which might have triggered those who had been stockpiling zydrine to release their inventory to market resulting in a sharp price decline in zydrine. At the same time the prices for the low-end mexallon and pyerite increased, but the market for isogen seems to be completely unaffected by this change and continued to decline throughout the period.

Looking more closely at the price for tritanium and pyerite reveals some interesting observations.

Figure 9. Averge daily price for Tritanium and Pyerite from June 1st 2006 through June 2007. Both low-end minerals start to increase in price after the new drone regions opened up.

The price of tritanium and pyerite seem to be following the same pattern though the price increase is much higher for pyerite. Tritanium rose from around 2 ISK per unit up to 2.8 ISK in late December 2006, dropping off slowly and leveling just above 2 ISK per unit. Pyerite increased sharply from 4 ISK per unit to nearly 9 ISK at the end of the first quarter in 2007 but has since dropped in price, trading at 7 ISK at end of June and is currently trading around 6.5 – 6.8 ISK per unit. The price increase, and then slow drop in prices, seems to coincide with an increase in production of capital ships throughout the first two quarters of 2007. What might have triggered this production increase could be increased warfare, and/or the price reduction in zydrine allowing for cheaper production of capital ships. This has however not been confirmed with current data but will be looked at more closely in the next Econ Dev Blog in September.

Looking at the high-end minerals zydrine and megacyte (figure 10) shows that price for these minerals developed differently. Zydrine, as mentioned before, drops in price due to increased supply from the drone regions but meagcyte increases in value, up to 4500 ISK per unit while zydrine falls to nearly 1000 ISK per unit. After drone alloys changed so less zydrine resulted from refining, the price of zydrine increased sharply but eventually leveled to around today's price of roughly 2000 ISK per unit.

Figure 10. Average daily price for zydrine and megacyte from June 2006 through June 2007. Price of zydrine drops due to new supply from drone regions while a steady supply and increased demand for megacyte results in higher prices.

EVE is so large it is difficult for anyone to grasp what is going on in all the regions at any given time. Yet the markets seem to be very efficient at distributing information resulting in symmetric prices throughout Empire space (and even further). This is clearly visible in figure 11 which shows the price for zydrine in three different Empire regions.

Figure 11. Zydrine prices from 2003 through June 2007. Prices are well correlated with price difference reducing over time.

Examining these time series in more detail reveals the price difference between regions is declining over time and price fluctuations within regions are also decreasing. This can be seen as evidence for increased efficiency in arbitrage trading over time resulting in symmetric prices and an overall more efficient market. However, there are still opportunities for entrepreneurs. Looking at more remote and unsecure areas we can see how much more the price tends to fluctuate. Figure 12 shows the price for tritanium in Domain, The Citadel, The Forge and Wicked Creek. The market for tritanium in Wicked Creek is obviously less developed than the markets in Empire most likely due to the majority of the minerals mined in that region are either used directly by corporations for their own production or hauled to the larger markets in Empire.

Figure 12. Price difference between Empire and zero-zero space. Price difference between Empire regions is again declining over time but huge price variations (and small quantities) in Wicked Creek result in trade opportunities for the small entrepreneur.

And in the end...

This first Econ Dev Blog (EDB) has given a descriptive overview of the major trends for the market of minerals in EVE. Overall trade quantity and volume has increased dramatically over the last 3 years and the price of minerals has fallen considerably due to increased mining efficiency through better tactics and improved technology. The price formation has also improved showing that price difference between regions is becoming minimal in Empire space and reflects only the time value of moving minerals in low sec. However, smaller population and the risk of piracy in zero-zero space results in less efficient markets with low volumes and great fluctuations in prices given an arbitrage trade opportunity for the brave entrepreneur.

This descriptive account has revealed several interesting facts which will warrant further examination in the future. Doing a wide scale comparison of prices in different regions, calculating implied travel costs and risk premiums for individual regions would be interesting for the professional trader who wishes to maximize his profits when margins are dropping. It will also be interesting to further examine exactly how the demand for capital ships affects the mineral market and to look into inventory numbers of minerals in order to see if traders are trying to manipulate the market by stockpiling and dumping minerals.

The next Econ Dev Blog will be published at the end of September, looking more closely at the market for ships and Tech II modules and how changes in demand for these items affect the market for individual minerals.

The first Quarterly Economic Newsletter (QEN) will be published before Fanfest 2007. The QEN will focus on macroeconomic indicators such as inflation, economic growth, wealth distribution, ISK supply and production.


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