Discuss about the Balance of Supply and Demand Market.
The dynamics of modern economics massively depend upon the demand and supply scenario of any commodity. As the quantity demanded exceeds the supply, the price of a commodity surges according to the crisis. Conversely, in the case of supply surplus and weak demand, the price of a commodity declines notably. The reported paper has reviewed the reason behind falling coal prices and identified the impact of the declining coal prices on the massive coal importing as well as exporting economies (Goldenberg, 2016). Moreover, the effect of the falling coal prices on the largest coal producing and consuming economies has been described to make a clear idea of the situation. Meanwhile, two basic reasons for declining prices of coal have been recognised herein. Due to low crude oil prices and sluggish demand for coal around the globe have massively contributed towards the drop down in coal prices (Thurber and Morse, 2015). Moreover, the paper reviews the impact of falling coal prices on many globe industries as well.
The fall in the price of coal has occurred due to several factors that impacts the demand and supply of the coal in the international market. The primary factors that have led to the fall in the coal prices are given as follows:
Environment Pollution: The high level of pollutants emitted from the burning of coal causes air pollution. On the other hand, the coal mines leads to aesthetic pollution in the environment (Rademacher, 2008). On the other hand, the bio-fuels are eco-friendly that has replaced coal. Hence, pollution is a primary reason for the fall of demand for coal in the international market.
Reduced demand in global market: The demand for coal has reduced in the international market due to level of pollution and increased cost of transport. Coal is much denser and heavier than other energy sources that increase the cost of transportation (Brodskii, 2010). Hence, it has led to the fall in the price of coal due to the fall in the quantity demanded.
Excess supply: Another primary reason for the fall of the coal price is the excess supply in the Australian market. It can be seen that the amount of supply has remain constant and the quantity demanded has fallen. Hence, it has led to oversupply of coal in the Australian as well as international market (Rademacher, 2008). Hence, excess supply has been identified as another factor leading to the fall in the coal price.
Political obligation: The political obligation such as price floor policy has led to the fall in the price of coal in the international market (Brodskii, 2010).
The above factors show that the demand for coal has decreased in a high level in the international market. On the other hand, the supply of coal has increased due to falling consumption (Brodskii, 2010). A graph has been presented below for better understanding:
Figure: Demand and Supply of Coal
Source: (Henderson, 2008)
It can be seen from the above graph that the demand for coal has reduced in the international market that has led to shift in the demand curve from D to D1 (Henderson, 2008). On the other hand, the fall in the consumption has led to increase in the supply from S to S1. Hence, the changes in the demand and supply curve have led to the fall in the price of coal from P to P1.
The falling price of coal has seemed to be highly positive for the massive coal importing economies such as India where the fossil fuel has identified as a scarce resource. For the industrial perspective of the Indian economy, the declining price of coal will be highly profitable (Perry, 2010). Considering the fading demand of domestic coal, the import volumes of coal may see a rise by 33% in the next couple of years. Significantly, the power sector of the Indian economy will get a certain lift as the power projects of Tata Power, Adani Power and Essar Power has run through imported coal from Indonesia and other coal exporting countries. On the other hand, the metal and cement industry’s cost of production will be down due to lower coal price (Buckley, 2016). As a result of the scenario, the net operating income and operating margin of the industries using coal as energy substitute will be improved in a considerable manner contributing towards overall GDP growth rate of the Indian economy (Thurber and Morse, 2015).
The huge price decline of coal has created a negative impact as far as export of coal is concerned. As a result of the consequences, Indonesian economy has faced significant economic headwinds threatening to the economic slowdown. The Indonesian mining industry has suffered the most due to the falling price of the fossil fuel. Meanwhile, the sluggish demand and ample coal production have contributed the economy’s turmoil leading to the fresh economic crisis. Under the current scenario, the export of coal was down by 49% in 2015 whereas in 2014; Indonesia exported 410 megatonnes of coal to the latest coal consuming economies of Asia such as India and China (Coca, 2016). Moreover, the outlook for the next couple of years is worst than ever creating fresh unemployment issues in the coal-mining industry of Indonesia. In the particular scenario, the mining industry is closing down coal production demanding for public subsidy. Apparently, the economic condition of Indonesia is looking considerably negative due to the falling price of coal (Guay, 2014).
The falling coal price has been a significant worry for massive coal producers as well as consuming economies such as the United States of America. Due to drop down in crude oil price, tightening global climate policy and sluggish demand of coal from around the globe have contributed towards high inventory level of coal in the USA (Bls.gov, 2016). According to the released data, in May 2016, the US coal production has seen a record decline by 33 percent on the year on year basis. Moreover, 233 coal power plants have been shut down in the US region showing the dismal situation of the demand for coal. Notably, the coal mining industry of the US has faced the biggest headwinds as per as job cuts, and profitability margins are concerned (Buckley, 2016). According to the data released by the US Bureau of Labor Statistics, since April 2014, more than10,900 employments were lost in the coal mining industry alone creating a negative impact on unemployment and jobless claim reports due to falling margins of operating business firms (Jeffrey, 2016).
Pros and cons are two sides of a same coin. Hence, where there is a benefit, there is a negative impact as well (Wagner, 2011). The businesses and industries that have benefited or lose out from the falling price of coal are presented herein below:
The industries or businesses that have benefitted from the fall in the price of coal are such businesses that use coal in their daily production model (Soderbery, 2015). In most of the cases, the industries such as electricity, railway, and large manufacturing firms are benefited from the fall of coal price. Furthermore, the industries or businesses that use large coal furnaces are highly benefited from the falling price of coal in Australia (Soderbery, 2015).
The industries or business that is likely to lose out from the fall in the price of coal are the coal manufacturing or dealing businesses. In other words, the coal industry of Australia is highly impacted by the fall in the price of coal. It can be seen that the contribution of the coal industry on the national GDP has decreased in the recent years (Wagner, 2011). Furthermore, several coal manufacturing firms have stopped their production due to revenue below the breakeven point. Hence, it can be seen that the coal industry of Australia is negatively impacted by the falling price of coal.
Conclusion
Decisively, the sluggish demand, tightening global climate policy and cheaper affordability of global crude oil have forced the price of coal to be dropped at a considerable pace to as low as $62 per metric ton in 2014-15 financial year. Meanwhile, the falling price of the fossil fuel has been significantly positive for massive coal importing economies as the power industry of the importing countries will be highly benefitted from the event. Conversely, the declining price of the commodity has been equally negative for coal exporting countries such as Indonesia fuelling fresh economic challenges such as unemployment, economic debt and growth crisis. Understandably, the massive coal consuming and producing nations such as the USA have to deal with tough economic challenges due to the fall in the price of coal fuelling unemployment.
References
Bls.gov. (2016). U.S. Bureau of Labor Statistics. [online] Available at: https://www.bls.gov/ [Accessed Sep. 2016].
Brodskii, V. (2010). Balance of supply and demand in the Russian market for coking-coal concentrates.Coke and Chemistry, 53(11), pp.416-427.
Buckley, T. (2016). Coal Decline Steepens in 2016 in India, China, U.S. – Institute for Energy Economics & Financial Analysis. [online] Institute for Energy Economics & Financial Analysis. Available at: https://ieefa.org/coal-decline-steepens-2016-2/ [Accessed Sep. 2016].
Coca, N. (2016). Indonesia’s coal addiction reaches new heights. [online] Southeast Asia Globe Magazine. Available at: https://sea-globe.com/19553-2-coal-indonesia/ [Accessed Sep. 2016].
Goldenberg, S. (2016). The death of US coal: industry on a steep decline as cheap natural gas rises. [online] the Guardian. Available at: https://www.theguardian.com/environment/2016/apr/08/us-coal-industry-decline-natural-gas [Accessed Sep. 2016].
Guay, J. (2014). Coal Exports Are Dragging Down Indonesia’s Economy — Is the US Next?. [online] Huffington Post India. Available at: https://www.huffingtonpost.in/entry/coal-exports-are-dragging_b_4987403 [Accessed Sep. 2016].
Henderson, H. (2008). Supply and demand. [Chicago]: University of Chicago Press.
Jeffrey, T. (2016). U.S. Has Lost 191,000 Mining Industry Jobs Since September 2014. [online] CNS News. Available at: https://www.cnsnews.com/news/article/terence-p-jeffrey/us-has-lost-191000-mining-jobs-september-2014 [Accessed Sep. 2016].
Perry, J. (2010). Energy prices. New York: Nova Science Publishers.
Rademacher, M. (2008). Development and perspectives on supply and demand in the global hard coal market. ZS Energ. Wirtsch., 32(2), pp.67-87.
Soderbery, A. (2015). Estimating Import Supply and Demand Elasticities: Analysis and Implications.SSRN Electronic Journal.
Thurber, M. and Morse, R. (2015). The global coal market.
Wagner, M. (2011). Supply-Demand Decomposition of the National Coal Model. Operations Research, 29(6), pp.1137-1153.
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