Rising Energy Cost and Impact on Profitability in Australian Manufacturing Sector
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This report discusses the impact of rising energy cost on profitability in the Australian manufacturing sector. It covers the current status of manufacturing in Australia, economic theories and concepts, and recommendations to tackle the situation.
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Running Head: ECONOMIC ASSIGNMENT Economic Assignment Name of the Student Name of the University Author note
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1ECONOMIC ASSIGNMENT Table of Contents Introduction......................................................................................................................................2 Article overview..............................................................................................................................2 Economic theories and concept.......................................................................................................3 Rising energy cost and impact on profitability............................................................................3 Recommendation.............................................................................................................................5 Conclusion.......................................................................................................................................5 Reference list...................................................................................................................................6
2ECONOMIC ASSIGNMENT Introduction Australian manufacturing sector is considered as one of the vital sector of the economy making significant contribution to the Gross Domestic Product. Some of the important industries in the manufacturing sector include food and drink, textile, chemical and motor vehicles. Australia’s advantage to access energy at a low price makes this sector highly dependent on energy. Most industries still rely on traditional energy consumption production techniques (Hasan and Boateng 2017). The poor management of energy thus lead to a significant increase in cost of production in the phase of soaring prices of energy. The current status of manufacturing in Australia is discussed in the report in reference to a published new article. Article overview The manufacturing sector of Australia is considered as one of the most energy intensive sector. As per International Energy Act, Australia is the only nation experiencing a significant upsurge in energy consumption from 2000 to 2015. The recently published energy efficiency report reveals that in terms of energy intensity Australia ranks third in world. The energy intensity level of manufacturing has reached to 15.3 mega joules recording a 1.5 percent increase in intensity (smh.com.au 2018). The most energy intensive industry is smelting industry of Australia. In terms of absolute energy consumption, Australian manufacturing has only 10 percent of the US total energy consumption but poor utilization of leads to an overutilization of energy in Australian manufacturing. Inspired from the low energy price, the sector has not taken any initiative to curb their energy cost. Rather the sector gives much attention to other fields of investment. Australia enjoyed a capital advantage in accessing a cheap gas and electricity price. As a result, Australian
3ECONOMIC ASSIGNMENT manufacturers overlooked the need for adapting energy efficient process and equipment. The decision is rational as long as energy had a low cost. The low energy price in Australia provided manufacturing considerable support. The scenario however has changed now. The businesses that were previously benefitted from a low energy price now faced the danger of a surging energy cost.The industries previously pay $3 to $5 to set up their process. The cost now increased by four times. The same industry now need to pay a price ranging from $12 to $20 for the same energy set up (smh.com.au 2018). With abolition of Australia’s advantages in energy, the energy intensive industriesfaceasevereriskofincreaseinproductioncost.AsrecorderbyAustralian Competition and Consumer Act many of industrial and commercial gas users either contract their production or close factories because of the constraint energy supply. Economic theories and concept Rising energy cost and impact on profitability Cost of production has an important role to play in determining profitability of a firm. The average and marginal cost are taken into consideration while estimating profit of the firm. The average cost implies costs associated with every unit of production. The marginal cost on the other hand is the additional cost for producing one additional unit (Perloff, Smith and Round 2013). The manufacturing sector in Australia records a considerable consumption of energy. Facedwithalowenergypricefirmslackedincentivetoincreasesenergyefficiency (energymatters.com.au 2018). Australian manufacturing industries have a higher energy intensity as compared to other manufacturing nations. The largest share of energy consumption is
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4ECONOMIC ASSIGNMENT accounted in transport sector. Manufacturing sector is the second bigger energy consumer after transport. The residential energy usages stand at 19 percent and service sector accounts for 14 percent energy consumption. In the traditional gas stations, the energy cost has been quadrupled with price per gigajoule now costs around $12 to $20 from previous price of $3 to $5. One factor contributing to rising energy price is a supply shortage in the gas stations. The medium sized food and non- foodmanufacturerinAustraliahaverecentlyexperienceda20percentpriceincrease (smh.com.au 2018). The rate of cost increment is 100 percent when compared over a period of five years. Figure 1: Effect of an increased energy cost on profitability (Source: as created by Author) In the above figure, the initial set of average and marginal cost curve is given as AC and MC. An increases in the energy cost result in an increases production cost. The cost curve now shifts upward. With new average cost curve AC’ and marginal cost curve MC’, profitability of the industry has reduced significantly.
5ECONOMIC ASSIGNMENT An increasing production cost results in contraction of output The burden of high energy cost lead to a decline in output of many of the manufacturing firms (businessinsider.com.au 2018). While some others have decided to close down their factories in the phase of an interrupted energy supply. Recommendation Many industries in Australia is now facing the risk of higher production cost mainly due to soaring prices of energy. The high production cost imposes a considerable burden on these industries (Rahmanet al.2015). Therefore, the energy intensive manufacturing industry in Australia need to find some way out to tackle the situation. The manufacturing sector should focus on improving energy efficiency. This can be done by installing energy efficient production techniques. The old equipment should be replaced with newer efficient ones. The only way to reduce energy cost is to curb its demand and make efficient use of energy in the production process. Conclusion The increasing energy cost has become a growing concern for energy intensive sector of Australia. Energy price has risen rapidly in recent years. The poor utilization of energy is one factor responsible for an overconsumption of energy in different industries. The traditional energy consuming production technology needs to be replaced with efficient equipment and production process.
6ECONOMIC ASSIGNMENT Reference list Energy Matters. (2018).RET Ending: Some Australian experts upbeat about solar power future. [online]Availableat:https://www.energymatters.com.au/renewable-news/ret-ending-experts- future-solar-power/ [Accessed 25 Apr. 2018]. Hasan, M. and Boateng, A., 2017. A Review of Manufacturing in Australia.Journal of Public Administration and Governance,7(3), pp.47-64. Latimer, C. (2018).Australian manufacturing poor on power. [online] The Sydney Morning Herald. Available at: https://www.smh.com.au/business/the-economy/australian-manufacturing- poor-on-power-20171208-p4yxjl.html [Accessed 25 Apr. 2018]. Latimer, C. (2018).Industry urges government to maintain momentum on energy policy. [online] TheSydneyMorningHerald.Availableat: https://www.smh.com.au/business/the-economy/industry-urges-government-to-maintain- momentum-on-energy-policy-20180420-p4zat6.html [Accessed 25 Apr. 2018]. Perloff, J., Smith, R. and Round, D. (2013).Microeconomics (Australian Edition eBook). Melbourne: P.Ed Australia. Rahman, A., Rasul, M.G., Khan, M.M.K. and Sharma, S., 2015. Recent development on the uses of alternative fuels in cement manufacturing process.Fuel,145, pp.84-99. Scutt, D. (2018).Australia's manufacturing sector has never been stronger. [online] Business InsiderAustralia.Availableat:https://www.businessinsider.com.au/australia-manufacturing- sector-pmi-record-high-2018-4 [Accessed 25 Apr. 2018].