The Impacts Of Falling Australian Coal Prices

Demand and Supply Analysis

Discuss about the The Impacts of Falling Australian Coal Prices.

Energy supply is a primary component for all the world operations taking place. The largest proportion of the energy utilized in the whole world comes from fossil fuels such as coal, oil and natural gas (McLamb, 2011). All these fossil fuels are not recyclable and thus have adverse effects. Their use leads to an increased carbon dioxide in the air; they are the most important factors responsible for the global warming (Clark, 2013). There have been many attempts to introduce recyclable energy sources, but this hasn’t been successful. The world’s supply of energy other than fossil fuels accounts for only like six percent. Despite the negative impacts resulting from the combustion of fossil fuels, the policies implemented to control its use are less effective. The demand for energy keeps going up (Sorrell, 2015).

This report will consider how the persistence in low coal price will impact both the importers and the exporters. On the importers’ side, the report will analyze how their willingness to demand will be influenced. And on the exporter’s side, we shall analyze how the producer’s willingness to supply will be reduced when the prices are low. The impact on specific businesses/ industries will also be considered. Various conclusions will be arrived at after the analysis has been carried out.

In the recent years, the demand for coal has gone up whereas its price has fallen. The price for any product is determined by its supply and demand force. The demand law is disregarded in this case since it holds that price should go up when demand rises. The explanation for this is on the supply side. An excess supply prohibits the price of coal from going up.

On the other hand, it is a fact that oil is a substitute for coal. Bearing the fact that of late the oil prices have fallen to very low levels, it has become difficult to raise the price of coal. This is because an increase in coal prices would make consumers shift from coal to oil consumption.

By assuming that good X is coal and that good X is oil, the demand will change as determined by the indifference curves and the budget line. Since coal and oil are close substitutes, an increase in the price of coal would cause a huge decline in its demand, and subsequently a huge demand for oil. For instance, Roberts (2016) argued that the presence of cheap natural gas is reducing the amount of coal production in the US.

Impacts on Importing Economies

Japan and India are huge importers of coal in Australia.  Initially, India experienced shortages in coal and spent much on importation; this has changed in the current period. The following diagram shows that the volume of Indian coal has gone up, though its importation bill is low. 

These economies and many others that import huge quantities of coal from Australia will have an advantage. When imports are not expensive, the importing countries make big profits. The GDP of these economies will go up since the reduction in import prices adds up to the net exports. Since net export is a major component in the GDP calculation, its increase raises the GDP level. With low coal prices, the importing economies are able to demand more coal with the capital planned for the same initially. Otherwise, they can import the same level of coal demanded earlier and then use the remaining capital in purchase of other goods and services. With the lower prices of coal, the industries depending on it for production will experience some reduced costs of production. These industries now may have the potential to raise their production level. An increased production means that more labour skills will be required for the same. The unemployment level in these economies will fall if there will be a substantial increase in production.

The other advantage is based on the benefits that consumers receive whenever an industry’s cost of production falls. Reduced costs of production allow more production of goods and services. When the supply of goods is high, the price for the supplied goods and services falls. The consumers’ well-being is increased as they can have some extra income for demanding extra units of the same or some other product.

Australia and Indonesia are some of the huge coal exporters. These economies will be disadvantaged in that they will receive lower revenue. The cost of production may become higher compared to the revenues raised. These economies will, therefore, lower their supply of coal. The goal of these economies is to maximize their wealth by supplying more at high prices. The GDP of the exporting economies will fall since the price reduction make exports cheaper, subsequently lowering the net export. The amount of foreign earning will be reduced. There is a possibility that some workers employed in this sector may get laid off until the price recovers; this is to reduce the production costs. Therefore, the result of this may be an increased unemployment rate.

Impacts on Exporting Economies

The economic well-being of the citizens will be reduced if coal was the main commodity of trade. The growth of the economy will stagnate since the tax revenue raised by the government is dependent on the revenue collected by the producers. The tax revenue will fall, and the spending by the government may be reduced. This will continue for some period since the coal prices are projected to remain weak for a period of time (Bhayani, 2015).

The domestic consumption of coal in USA and China is very big. However, these economies have high production level of coal. A fall in the price of coal means that the consumers will demand more quantities. Huge domestic demand with a high production capacity creates pressure for a higher production (Thehindu.com, 2014) Growth of the economy will be experienced in such economies since their costs of production will be reduced (Sorrell, 2015). Employment will rise in the industries as a result of increased production capacity. The supply of coal won’t be affected even if its ftiftoutput level is below the marginal cost (colonialfirststate.com.au, 2015). Since it will translate into other goods and services being offered at a lower price, it can be said to have a deflationary effect. Those economies with issues of high inflation rate will get more benefits from the price cut. The economic well-being of the households will be raised from the consumption of low-priced goods and services.

However, it may cause a disadvantageous effect considering it from some other perspective. An increased domestic demand means that the economies will be left with less coal for exportation. Revenues earned from foreign economies will be reduced.

All those businesses/industries dependent on coal for production will benefit when its price is cut. The benefits are in terms of reduced production costs.

The steel industry is said to have benefited much from the coal price decline. According to Roche (2016), all the companies dependent on steel will have great benefits. These companies include; engineering, automobile, infrastructure, etc. Timesofindia-economictimes (2013) argued that the companies that benefit from a cut in coal prices are those that supply power and the private power generators. Businesses whose price of goods will fall owing to the reduction in production costs will benefit in that consumer’s demand for their products will go up.

The industry that can be said to be losing from the cut in coal price is its own industry. For example, the value of the US coal industry was 34 Billion in 2011, and in 2016 it’s only 150 Million (Roberts, 2016). The coal companies are screwing their workers as most of them are getting bankrupt.

Conclusion

Fossil fuels are increasing in demand over the years. Their production, therefore, keeps going up. The importers of coal will have great benefits owing to its low prices. Whereas the importing economies will be enjoying the benefits, the exporting economies will be worsened off. Some businesses and industries will benefit or lose more than the others. There are many circumstances that can’t allow for a rise in the coal’s price’ it is, therefore, going to remain low. Both the demand and supply of a product and for the products related to it affects its price level.

References

Bhayani, R. (2015). Raw material costs to remain low in FY16, to aid operating margins. [Online] Business-standard.com. Available at: https://www.business-standard.com/article/companies/raw-material-costs-to-remain-low-in-fy16-to-aid-operating-margins-115060800151_1.html [Accessed 16 Sep. 2016].

Clark, D. (2013). Why can’t we quit fossil fuels? [Online] the Guardian. Available at: https://www.theguardian.com/environment/2013/apr/17/why-cant-we-give-up-fossil-fuels [Accessed 15 Sep. 2016].

Colonialfirststate.com.au. (2015). The impact of lower oil prices on Australian equities. [Online] Available at: https://www3.colonialfirststate.com.au/content/dam/wm/advisers/investments/docs/FS6219.pdf [Accessed 16 Sep. 2016].

Cunningham, N. (2016). The Decline of the Coal Industry is “Long-Term” And “Irreversible” | OilPrice.com. [Online] OilPrice.com. Available at: https://oilprice.com/Energy/Coal/The-Decline-Of-The-Coal-Industry-Is-Long-Term-And-Irreversible.html [Accessed 17 Sep. 2016].

McLamb, E. (2011). Fossils Fuels vs. Renewable Energy | Ecology Global Network. [Online] Ecology Global Network. Available at: https://www.ecology.com/2011/09/06/fossil-fuels-renewable-energy-resources/ [Accessed 15 Sep. 2016].

Roberts, D. (2016). The US coal industry is falling apart. Here’s a surprising reason why. [Online] Vox. Available at: https://www.vox.com/2016/2/22/11090878/us-coal-industry-falling-apart [Accessed 16 Sep. 2016].

Roche, T. (2016). When Coal is on Dark Side of Business. [online] Thesmartcube.com. Available at: https://www.thesmartcube.com/insights/sourcing/item/when-coal-is-on-dark-side-of-business [Accessed 16 Sep. 2016].

Sorrell, S. (2015). Reducing energy demand: A review of issues, challenges and approaches. [Online] Sciencedirect.com. Available at: https://www.sciencedirect.com/science/article/pii/S1364032115001471 [Accessed 16 Sep. 2016].

Thehindu.com. (2014). India Inc to benefit as imported coal prices set to fall. [Online] Available at: https://www.thehinvdu.com/business/Industry/india-inc-to-benefit-as-imported-coal-prices-set-to-fall/article6730983.ece [Accessed 16 Sep. 2016].

Timesofindia-economictimes. (2013). Falling commodity prices relief for India Inc. [online] Available at: https://articles.economictimes.indiatimes.com/2013-04-17/news/38616546_1_coal-prices-oil-marketing-companies-brent-crude-oil-prices [Accessed 16 Sep. 2016].