Demand and Supply Analysis of Australian Coal Market

This study analyses a news article pertaining to the increase in the demand for coal supplied from Australia. The study explains the effects of external factors on the market and how the market may behave in the long run.

1
ECONOMICS ASSIGNMENT

2
Table of contents
1.0 Introduction..........................................................................................................................3
2.0 Analysis................................................................................................................................3
3.0 Conclusion............................................................................................................................7
Reference....................................................................................................................................8

3
1.0 Introduction
Demand and supply are one of the important and major theories of economies. The other
theories and models of economies are heavily dependent on the assumptions of the demand
and the supply theory. In this study, a news article has been analysed and explained through
the use of principles of demand and supply. The news article considered for the study is
“Demand for Australian coal escalates, building on last year's turnaround" which was
published in the newspaper ABC News Australia. Information from this source and from
other related secondary sources have been used in presenting the study of this paper.
2.0 Analysis
The ABC news Australia is a subsidiary news channel of Broadcasting Department of the
Australian government. In this news portal, on 28th June 2018, news has been published that
highlights the increase in the demand for Australian coal in the international market. It is
important to note that Australia is among the top coal-producing countries of the world. The
annual coal production of Australia, as per the figure for 2017, is 580 million tonnes which
helps it to stand at a 4th place in the list of largest coal producing nations of the world. In
addition to that, it is also important to note that, a significant portion of the produced coals of
Australia is exported to Asian countries ("The demand and supply of criminal opportunities."
2018). Apart from the Asian countries, Australia also exports coal to different Europeans and
Latin American nations as well.
As per the report, the demand for coal from the side of Asia has increased since the last year.
It has been reported that, by the year 2030, the demand for coal of Australia will increase by
400 million tonnes. That means, in this case, the demand curve has shifted to the right side.
Although there has been no influence on the supply side of the coal market, the prices have
increased following the principles of demand and supply. The article reports that Newcastle
harbour is experiencing a rise in the docked ships that are here to collect coals or to deport
coals to the markets of Asia (Fama and Kenneth 2016). According to the principle of demand
and supply, the increase in demand for a certain product can be due to various external
reasons. This is due to the facts that, demand for a certain product depends on external factors
such as income of the customers, number of customers of the market, changes in the tastes
and the preferences and many more. In each of the cases, the changes shift the demand curve
either to the right or to the left.

4
Figure 1: The supply and demand in the coal market in the short run
(Source: Friedman, Milton 2017)
In this context, the article reports that the root of the increase in the demand for coal has been
the changes in the market. There have been two factors that have led to the rightward shift of
the demand curve. First and the foremost is the income of the customers of the market. In this
case, the customers of coal in the market are the Asian countries. (Iossa and David 2017)
stated that, Asian countries have shown signs to further development since the year 2013. It
also needs to be noted that, 2013 is also the year, the coal industry of Australia deteriorated.
Nevertheless, the boom in the economy of the Asian countries led to the development of
infrastructure in this area. As a result, each of the countries which used to be trade partners
with Australia before 2013 increased their demand for coal from Australia.
Another important factor that has led to the increase in the demand for coal from Australia is
the fact that, since the year 2013, other Asian countries which did not trade partners with
Australia started to increase in economic activity. According to the reports, countries such as
Malaysia, Vietnam and Thailand became one of the important trade partners in Australia.
The economic growth and the development allowed these countries to increase their demand
for affordable coal from Australia too. (Cowell 2018) in this regard noted that the population
of these countries also played a significant role. The increasing population of these Asian
countries led to more and more investment and hence the requirement for affordable energy

5
increased. This is also explained by the principles of demand and supply theories as well
(Sahlins 2017). According to theories of demand and supply, the increase in the number of
customers leads to higher number of demand for a given price and hence the demand curve
shifts to the right side. The same has been the case for Australia’s Coal market as well.
Figure 2: the supply and the demand for coal in the long run
(Source: Myers 2016)
Thus, these are the effects of the external factors that led to the changes in the market for
Australian coal before the equilibrium price. Now, the increase in demand for the Australian
coal also had its repercussions on the equilibrium of the market as well. (Waldman 2016)
noted that, the major impact of changes in demand is on the equilibrium price level and the
quantity. As per the theory of demand and supply, given the unchanged level of supply, when
the demand curve moves to the right side the price increases. This is due to the fact that, as
the supply is limited, the sellers sell the products to the customers who have the higher
willingness to pay. Therefore, the market clearing price increases leading to an increase in the
price. This explains the increase in the selling price of coal as well. The coal prices which
plunged into $40 per metric ton during the year 2013, increased to around $200 per metric
ton. The price elasticity of demand for coal is high and hence the demand is high as well.
Despite the high prices, the queues in the harbours of Australia increased. According to,
(Myers 2016) increase in demand with a given supply level can lead to a temporary shortage
of supply which disallows a huge number of customers to buy the products from the market.
The increase in the demand in case of Australian coal has resulted in a temporary shortage of

6
supply in the market. Again, this supply shortage is also the reason behind the increase in the
equilibrium prices in the coal market of Australia. However, one of the common
repercussions that can be expected after the increase in demand for coal is the increase in
supply too (Carbaugh 2016). That will enable the suppliers of the market to take the
advantage from the increasing import demand from the countries of Asia. Although the
process to increase the supply capacity of the market is long term it will shift the supply
curve to the right side which will help in bringing down the prices of coal in the future.
However, whether the prices for the coal will be lower than the initial prices before the
increase in demand will depend mainly on the extent of increase in the supply capacity of the
market relative to the increase in demand. If the increase in supply for the coal is lower
compared to the increase in the demand, the price will fall but still be more than the initial
market prices for Australian coal.
Now the concept of elasticity comes here too, Coal is among the products that are essential
for daily operation of the economy. Coal produces energy which runs different activities of
the economy. As the economy expands and the infrastructure develops, more and more coals
are required. Apart from that, coal is also the cheapest energy forms available. Therefore the
elasticity of coal is also very high. This explains the reason for high demand despite the price
of coal in Australia being high. It also needs to be noted that when the prices of an elastic
good such as coal increases revenue of the seller increases in the market. Consequently, more
and more sellers get attracted to the market. This explains the possibility of higher supply
capability of the market following this increase in the price of coal of Australia.
The repercussions of the supply-demand mechanism in the coal market of Australia does not
end here. The report also highlights another market where this demand and supply theory can
explain further changes. The housing market among the mining communities is also on the
upswing. That means workers at the mining sites are raising their demand for housing in
nearby areas in order to supply their labours in the mining site. Same as the coal market, the
supply side of housing market among the mining community is also not changeable in the
short run which eventually leads to increase in the price of housing market among the mining
community (Friedman 2017). In this case, the supply curve remains unchanged in the short
run and the demand curve for housing shifts to the right. Consequently, the prices of housing
in these areas increase following the same logic as in the case of the coal market. The
principle of demand and supply follows the same path and increases the prices for the
housing.

7
Figure 4: The demand and supply for housing in the mining community in the short run
(Source: Friedman 2017)
Thus, this shows the inter-link between the different markets that the theory of supply and
demand establishes. That also calls for further changes in the long run. In other words, when
in the long run, the supply of coal would increase and the prices of coal would decrease. Less
and fewer companies would be entering in the supply side and the labour demand would also
fall. Consequently, the demand of the labours to buy a house in the nearby areas would also
go down leading to normalcy or the reduction in the price of housing.
3.0 Conclusion
Therefore, this study focused on the analysis of a news article pertaining to the increase in the
demand for coal supplied from Australia. The increasing demand comes from the
improvement of the Asian trade partners of Australia in terms of economy. Apart from that,
other countries also become trade partners of Australia corresponding to their respective
economic performances. This following the theories of economies shifts the demand curve to
the right side. Given the unchanged supply in the short run, the increase in demand resulted in
prodigious supply shortage and hence the price for the coal of Australia soared. The study
also showed how the market for coal of Australia may behave in the long run when the
supply capacity of the market will increase. Besides, the study also sheds light on the
interlinking effects of supply and demand theory. The demand and the supply mechanisms
that worked in the coal market of Australia also influenced the housing market of the mining

8
community as well. It showed the prices of one market can increase the price of another
market which is linked to the former one. In the long run, with further changes in the market
of coal, the price in both the market can become normalised in the future with the help of the
supply and the demand mechanism of the market.

9
Reference
"Demand For Australian Coal Is Surging, Driven By Asian Growth". 2018. ABC News.
http://www.abc.net.au/news/2018-06-28/australian-coal-demand-surging-driven-by-asia/
9914058.
Cook, Philip J. 2017. "The demand and supply of criminal opportunities." In Crime
Opportunity Theories, Routledge pp. 127-153.
Fama, Eugene F., and Kenneth R. French. 2016. "Commodity futures prices: Some evidence
on forecast power, premiums, and the theory of storage." In The World Scientific Handbook
Of Futures Markets, pp. 79-102.
Friedman, Milton. 2017. Price theory. Routledge.
Friedman, Milton. 2017. "Quantity theory of money." The new Palgrave dictionary of
economics (2017): 1-31.
Iossa, Elisabetta, and David Martimort. 2017. "The simple microeconomics of public‐private
partnerships." Journal of Public Economic Theory 17, no. 1 (2015): 4-48.
Kirschen, Daniel S., and Goran Strbac. 2018.Fundamentals of power system economics. John
Wiley & Sons.
Cowell, Frank. 2018. “Microeconomics: principles and analysis.” Oxford University Press.
Sahlins, Marshall. 2017. “Stone age economics." Routledge.
Waldman, Don, and Elizabeth Jensen. 2016. “Industrial organization: theory and practice.”
Routledge.
Myers, Danny. 2016. “Construction economics: A new approach.” Routledge.
Carbaugh, Robert. 2016. “Contemporary economics: an applications approach.” Routledge.

10
Appendix
1) The news article
Demand for Australian coal
escalates, building on last
year's turnaround
ABC Upper Hunter
By Cecilia Connell and Mike Pritchard
Posted 28 Jun 2018, 6:26am
PHOTO: Aerial view of the coal loader at Newcastle. (Supplied:
Port Waratah Coal Services)
RELATED STORY: $5b coal export terminal plan for Newcastle scrapped
RELATED STORY: Are we there yet? Mining investment downturn nearly over
RELATED STORY: China struggles to kick its coal habit even as it pledges to increase renewable energy use
Demand from the Asian market is pushing prices for both
thermal and coking coal up and, according to analysts, the
trend is set to continue.
So much so, a study commissioned by the Minerals Council of
Australia predicts a 400 million tonne increase in annual demand by
2030 — double Australia's total thermal coal export level in 2017.
As demand for Australian coal escalates, an horizon dotted with
coal ships waiting to enter Newcastle Harbour — the world's largest
coal port— is a typical sight.
Executive director for coal Greg Evans said the increase in demand
built on last year's market turnaround.

11
"The 2017 year was actually a record year for coal exports, some $57 billion," he said.
The increase in demand has been attributed to infrastructure
building programs throughout Asia, along with increased
industrialisation and urbanisation.
Mr Evans said that went hand-in-hand with the need for affordable
energy.
"That's the economic expansion story which is happening in Asia.
It's happening from Pakistan through to Vietnam, with economic
development and population growth," he said.
"Breaking it down and looking at where demand is coming from,
there will still be continued demand from those North Asian
countries which have been the bedrock of the Australian coal
industry in terms of Korea, China and Japan, but what's interesting
now is that demand is developing in South East Asia, in countries
such as Malaysia, Vietnam and Thailand.
"The question is for Australia, to what extent can we participate in
the benefit of that higher import demand?"
PH
OTO: Coal loaders at the Port of Newcastle. (Supplied: Port Waratah Coal Services)

12
Ship queues at Australian coal ports
PHOTO: Graph showing the Newcastle thermal coal price in
US dollars per metric tonne, free on board basis. (Supplied: S&P Global Platts)
The increase in demand comes after the market dimmed in 2013,
sending shockwaves through mining communities in New South
Wales and Queensland.
Senior coal analyst with S&P Global Platts Mike Copper said prices
hit rock bottom in 2016.
"We saw US$40 [per metric tonne] for Newcastle, and for
Queensland coking coal it was about US$80 per metric tonne," he
said.
But that price doldrum has now recovered.
PHOTO: Graph showing thermal coal prices at Newcastle Port,
in US dollars per metric tonne free on board basis, since January 2017. (Supplied: S&P Global Platts)
"For the coking coal market, prices are around US$200 per tonne
coming out of ports in Queensland and for Newcastle Port, the
grade that goes to Japan, thermal coal is trading at US$120 per

13
metric tonne – that's the highest since the post Fukushima accident
in 2011," Mr Cooper said.
As well as the rising dollar figure, the stark demand for coal has
been illustrated by the high number of ships waiting to load at
Australian ports.
"We haven't seen queues at these levels for several years," Mr
Cooper said.
"Newcastle Port has had queues going up to about 22 ships, all
waiting to get coal delivered down to the port.
"In Queensland, Dalrymple Bay Terminal, Gladstone Port, they've
had queues up in the double figures."
Housing market in mining communities on
the upswing
Renewed demand for Australian coal has had flow-on benefits for
rural towns in the mining supply chain, including Muswellbrook on
the Hunter coalfields.
Local real estate agent Grant Jupe said it was a welcome boost for
the region's property market.
"Rentals are going very, very strong and vacancy rates are pretty much non-existent," he
said.

14
PHOTO: Cars
drive along the main street of Muswellbrook, NSW. (ABC Newcastle: Robert Virtue)
"During the lull that we did experience a few years ago, there was
over 400 vacant homes in town, so it has taken time for that to turn
around, but we're definitely at that point now.
"I think a lot people sat tight seeing what would happen, and now
buyers are starting to get back into the market again."
Topics: mining-industry, coal, business-economics-and-finance, trade, muswellbrook-2333,
singleton-2330, newcastle-2300
Contact Cecilia Connell
More stories from New South Wales