An Economic Analysis of Australia's Coal Sector and Its Demand

This report provides an economic analysis of Australia's coal sector, examining the interplay of supply and demand dynamics. It explores the country's vast coal reserves and their significance in fulfilling energy demands, while also considering the impact of global trends, such as the shift towards renewable energy sources. The report delves into the market competitiveness of the coal sector, highlighting its oligopolistic structure and the influence of government regulations. It also analyzes the market structure, including factors affecting coal demand and supply, and the price elasticity of demand. The analysis considers the sector's volatility and the impact of both high and low coal prices on production, consumption, and the overall industry. Furthermore, the report discusses the future outlook for the Australian coal sector, considering factors such as declining demand from major importers and the rise of cleaner energy alternatives.

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Australia’s Coal sector and its Demand

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Table of Content
Topic Page No.
Introduction ............................................................................. 3
Coal Industry in Australia ...................................................3
Analysis: Supply and demand of Coal ............................... 4
Degree of Market Competitiveness: ....................................5
Market Structure of Coal Sector .........................................6
Conclusion -----------------------------------------------------------7
References ------------------------------------------------------------8

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Introduction:
Coal Industry has been main source revenue for many country’s economic growth, which is
one of the main stay of export earnings for many a countries. Human being started extracting
coal from the earth may be centuries back. Coal industry plays crucial role in shaping up
economic development of many country. Coal industry is a major part of mining industry. As
mentioned above it is also play important role in shaping up economic development of a
country. It is a well known fact, that coal sector is very capital intensive sector and required
big capital expenditure to develop any Greenfield project in this sector. In today’s world coal
sector is main resource for energy requirement of human being across the world and Australia
is also one of the important players of this field.
Importance of the sector can be judge by the capital expenditure incurred by some big
companies of world and Australia. Following graph has shown mining expenditure occurred
by top mining companies, like, BHP, Rio Tinto, Glencore and Angle American.
Capital Expenditure in Mining sector by world’s top companies
Coal Industry in Australia
Australia has vast coal reserve, which available abundantly in various parts of it. Australia’s
huge coal reserve is one of the major sources of energy requirement in Australia. Coal
contributes in fulfilling 60% of Australia’s electricity demand through coal-fired power
stations. Recent data has shown Australian total Coal production, including black and brown
coal, at 414 million tonne, which is 5% of world total coal production. Australia has ranked
4th position in coal production in world; table given below has a list of all top coal producing
countries, rank wise.

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World Production of Coal (in million tonne)
Rank Country Black Coal
(Mt)
Brown Coal
(Mt)
Total Coal
(Mt)
Percentage
(%)
1 China 2344 1127 3471 46%
2 United States
of America
917 73 991 13%
3 India 539 41 580 8%
4 Australia 345 70 414 5%
5 Russia 256 78 334 4%
6 Indonesia 197 179 376 5%
7 South Africa 253 0 253 3%
8 Germany 12 177 189 2%
9 Poland 76 63 138 2%
10 Kazakhstan 111 6 117 2%
Others 737 10%
Total 7600
Source: International Energy Agency and the Bureau of Resources and Energy Economics
Recently published article by Guardian News paper, highlighted the fact that Australian
thermal coal demand is going to go down gradually in future, because there is growing
realization of negative environmental impact of fossil fuels across the world, particularly
countries which were the main importers of Australian coal, like China, Europe and Latin
America (Tanevski, V. 2019) Report prepared by Australian Economist has indicated that any
wishful thinking of demand decline of above mentioned countries will be compensated by
demand from India and east Asian countries, were far from truth, because, India’s growing
realization of negative side of fossil fuels and shifting it energy requirement to more cleaner
green fuel like solar energy and wind energy. Renewable energy not only sustainable and
environmental friendly, but also it 30% cheaper then coal based energy generation (Smee, B.
2019). So, all in all it is profitable business for India to shift its energy requirement to greener
fuels, rather than energy generated using fossils fuels. But, all these thing is in fact prediction
for coming years, currently position is that Coal is Australia’s one of the major source of
export earning and will remain for some more years or till the time renewable energy
production substantially increase in above said countries like China, India, and east Asian
countries.
Analysis: Supply and demand of Coal
Economics theory of supply and demand plays very significant role interchangeably in
determining price of coal industry. Presently, when there is possibility of demand of
Australian coal would going up, ist prices has fallen sharply in Australian market due to the
factor of supply and demand theory of Economics. As long as demand remain sluggish prices
of industry would remain low and it will hamper it production and finally supply and demand
would get adjusted automatically as per the equilibrium condition of supply and demand, as
per the market condition and requirement. Present condition of declining demand is not
attributed to only price factor, in fact it is more related to other than the price factor, like
switching over to greener and more clean fuel due to environmental issues. So, this is not
normal supply and demand problem but this due to the effect of other forces. Which refer as
changes in other than the price of product, which is here in this case if switching over to

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environment friendly energy resources. Australian Coal sector has also got impacted by the
fluctuation in supply and demand of Coal industry. Coal industry is also like oil sector is
heavily volatile sector due to its limited availability and also, is one of the non-renewable
sources of natural resources. This sector or industry is very prone to the theory of supply and
demand, that is, Coal industry or sector, any problem in supply of these commodities take the
price of Coal sector very high in very short period of time. The main determinants of the
price of Coal sector is volume of its supply, if supply is in large volume than its price fall
dramatically and if it supply get squeezed than it price increases in very short time.
Allocation of resources of companies depends on cost of Coal prices at the prevailing
circumstances. Industry is highly affected by the Coal prices, it gives certain incentive to
industry player, which ultimately helps in determine demand and supply in industry and
eventually price of coal.
It can be better understand by an example, if prices of Coal remain high for longer period of
time, it force consumer to cut consumption of Coal. Cost of energy also determines it
consumption, costlier fuel promote energy conservation and reduce demand. On the other
hand, if prices of Coal are high, producer promoted to produce more coal, spend more capital
on mining activities and R&D for newer technology to enhance their production, which was
not that easy when Coal prices were low. High Coal prices make non-viable projects to viable
in the sector. All these activities lead to increased supply of Coal and related products.
Similarly, low Coal prices has its own advantages, like, it reduces cost of production of
manufacturing goods and commodities. But, for Coal sector it works as a dis-incentive, which
forces them to cuts its production and ultimately it deteriorate financials of Coal sector’s
companies. It also severely hit supply of Coal. Low Coal prices could shift demand to
upward trajectory.
Degree of Market Competitiveness:
Coal sector is primarily oligopolistic type of market which is generally; dominated by a few
large player and they compete each other among themselves to stay in market. Since entry
barrier is quite high, not only in terms of capital expenditure but other very stringent rule and
regulation as well, very few players able to enter in this type of market structure. It is highly
concentrated market, which is also highly regulated by Government, there interference
become even more necessary, when Coal prices, all of sudden rises due to some geopolitical
risk. So generally, this sector though oligopolistic in nature, it required government
interference, time to time, keeping in mind volatility of international Coal market.
Historically it is found that coal prices have been less volatile and more stable as compare to
oil and gas. It is more affordable way of generating electricity in developing countries for
decades. In today’s world industries required electricity to perform its operational activities
and run its plant regularly, to do this it require affordable electricity. High energy cost can
affect competitive advantage that any company have and can cause problem for longer period
of time. Power surplus countries can easily avoid these kinds of situation and serve its
purpose without any hindrance, but it is not the case with countries, which depends upon
power, supplied by other countries nor have power agreement with other some entity or
country. These measures like uninterrupted power supply can become boon in economic
growth and industrialization of a country (Coal market & pricing. 2019). Here in this case,
price of Coal sector is expected to go down due to it expected fall in demand from India and
East Asian countries and subsequent fall in price of coal. Though, in recent months, sector
remain very volatile, but in coming years and months it is expected to fall in demand due to

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swings in global expectations towards more cleaner energy sources in Coal producing region.
Coal sector helps in developing industry of a nation and those countries that have sufficient
coal reserve can take pre-emptive measures to restrict any such situation which can lead to
economic and industrial fall down of country. Ample coal reserve can work as cushion for
any country and can reduce or increase its production as per the situation demands and can
act accordingly (Coal. (2019).
Market Structure of Coal Sector
This sector is primarily oligopolistic in nature but competition still exists though in limited
way and heavily regulated by government. The application of theory of supply and demand in
this sector can be visible through following given scenario. The Coal demand is characterised
by many important factors, these are the following:
Growth of demand of thermal coal in 2019 in Asia Pacific market would require an extra 3
MT and by 2023 it is expected to touch 34 MT thermal coal demand in the same region,
which will be majorly led by India and East Asian countries. But, by 2023 it is expected that
production level growth would return back to 2018 level. Which clearly indicates declining
phase of coal production (Latimer, C. 2018).
Australian high CV thermal coal supply 2018-2023
Above given diagram shows how is the supply coal is going get effected in coming years, it
shows that in coming few years, coal supply would rise but after few years supply is going to
go down because it is expected that it demand would fall due to it negative environmental
impact and cheaper availability of renewable source energy like wind and solar. Coal demand
would certainly going to go down because of two reason, first, electricity generation through
thermal coal is not as cheap as wind or solar generated energy and second factor is fossil
fuels generated electricity is not environment friendly and countries across the world
gradually switching over to greener fuels like Solar and wind energy is not only environment
friendly, but cheaper also.

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These all above scenario indicating slowing down of demand of coal in very near future and
eventually impacting its price and productions well, because producer would find it not that
much profitable as compared to previously it was. Coal has a few direct substitutes, that is
why, its demand is relatively inelastic in respects to its price. Which means, even if its price
rises, its demand not fall in that proportion or fall very insignificantly.
Conclusion
So, it can be seen that, there is very clear-cut relationship exist between Coal sector demand
and supply and it impact in the price of Coal in long term as well as in short term. Coal sector
is always remains volatile and nothing can be taken for granted in terms of production,
specially, supply of these commodities. Demand is not going to vanished overnight and also
very slow growth in other source of energy, like non-renewable source of energy, putting
extra burden in the Coal sector. But it is also important to note that fossil fuel is not going to
meet our demand in coming future. As long as our over-dependence on fossil fuel remains
high price volatility of this sector is not going to eliminate very soon. Neglecting supply of
the global energy situation and keep increasing its demand could create serious imbalance in
future, which is not very far away. Coal reserve is not renewable source of energy, one day it
is going to deplete after its reserve gets exhausted. Countries with high coal reserve fill secure
in their energy needs and could fulfill its domestic energy demand by household and
industrial unit.

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References
Coal market & pricing. (2019). Retrieved 12 September 2019, from https://www.worldcoal.org/coal/coal-
market-pricing
Coal. (2019). Retrieved 12 September 2019, from https://www.ga.gov.au/data-pubs/data-and-publications-
search/publications/australian-minerals-resource-assessment/coal
Latimer, C. (2018). Coal is Australia’s most valuable export in 2018. Retrieved 12 September 2019, from
https://www.smh.com.au/business/the-economy/coal-is-australia-s-most-valuable-export-in-
2018-20181220-p50nd4.html
Smee, B. (2019). Australian thermal coal exporters warned of falling demand from India. Retrieved 12
September 2019, from https://www.theguardian.com/environment/2019/aug/23/australian-
thermal-coal-exporters-warned-of-falling-demand-from-india
Tanevski, V. (2019). Australian high CV thermal coal prices at 19-month low, but not for long. Retrieved 12
September 2019, from https://www.woodmac.com/news/australian-high-cv-thermal-coal-prices-
at-19-month-low-but-not-for-long2/