Analysis of Demand and Supply for Coal in the Australian Market

This report analyzes the demand and supply dynamics of the Australian coal market. It examines how global and domestic factors, such as declining demand from major importers like Japan, South Korea, and Taiwan, and the rise of renewable energy sources, have impacted coal prices and the Australian coal mining industry. The report applies economic principles to explain the shift in market equilibrium, resulting in reduced coal prices and potential mine shutdowns. It also discusses the role of government policies, including tax reliefs, subsidies, and price flooring, in maintaining equilibrium within the Australian coal industry. The conclusion emphasizes the challenges faced by the Australian coal sector due to decreasing demand and the need for strategic interventions to support the industry.

Running Head: ECONOMICS FOR BUSINESS 1
Demand and Supply of Coal in Australia
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In the global as well as domestic markets, commodity prices are largely driven by the
demand and supply side factors (Richardson, 2013). In a constant demand scenario, if the supply
of a product is declined, the price of the commodity will see a surge. On the other hand, if the
demand of a commodity is increased in a stable supply market, the price hike of the resource will
be evident (Forstater, 2017). In this particular study, an article has been selected to identify how
demand and supply of coal from the global market has created an impact on the price of the
commodity in Australia.
In the identified article, Slezak (2017) has reviewed how international demand of coal
will impact the export as well as the domestic price of the resource in Australia. Currently,
Australia can be termed as one of the largest coal exporting countries around the globe. But, in a
recent couple of years, the biggest foreign purchasers of Australian coal have shown the
intention to cut down the consumption of coal. As result of the circumstances, the price of
Australian coal has seen a sharp decline due to worries in terms of demand reducing the
profitability of the Australian coal mine businesses (Wonhas, 2014).
In the existing market scenario, Japan, South Korea, and Taiwan can be recognised as the
leading thermal coal importing economies in the world. According to the reports, together these
three countries have purchased 70 percent of the Australian export coal (Slezak, 2017). The
recent analysis and forecasts of the Chief Economists of Australia have been significantly
different to that of the projection of the Institute for Energy Economics and Financial Analysis
(IEEFA). According to the Australian Officials, the coal industry in Australia will be projected to
increase by 8.7 percent by 2022 whereas the global export market for coal will grow by 2.5
percent by 2022 (Slezak, 2017).

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Contradictorily, IEEFA analyst, Tim Buckley has stated that projections are entirely
invalid as in real life the market of coal will originally contract due to consumption cut in leading
coal importing economies such as Japan, China, South Korea, and Taiwan. Reportedly,
consumption of coal in Japan has been declined as consumers are turning towards renewable
energy. Also, environment policies of South Korea have restructured the electricity production
sector suspending ageing coal power plants in the nation (Slezak, 2017). Due to such measures
that were taken by the leading coal importing economies, the coal export market will certainly
face a major setback in the near future.
Additionally, the coal industry can evident a fall in the domestic demand due to the
developing technology and better availability of renewable energy sources. The carbon reducing
policy of the Australian Government has forced the major manufacturing companies to shift to
renewable energy sources in order to reduce the emission of greenhouse gas (Palmer, 2014). The
introduction of electric furnaces in the manufacturing firms has resulted in a decline in the
demand for coal. In other words, the shift in the use of energy has resulted in a decrease in the
consumption of coal that has further lead to the fall in the demand for coal in the Australian
market.
By applying the theory of demand and supply, it can be seen that the downfall in the
domestic and global demand for coal has resulted in the fall of market equilibrium that has
further led to the fall of aggregate price of coal in both the global and domestic market. A
diagram has been presented herein below for further understanding:

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Figure: Declining demand for coal in Australia
Source: (Farmer, 2008)
It can be seen from the above diagram that the decline in the demand for coal leads to a
leftward shift in the demand curve from D1 to D2. However, the supply remains constant at S
due to the continuous production of coal in the Australian market. Furthermore, a shift in the
market equilibrium level can be evident in the Australian coal market from e to e1. Moreover, a
decline in the consumption can be evident from Q1 to Q2. Hence, the falling export quantity of
coal due to the declining global demand and less consumption of coal in the Australian market
has resulted in a fall in the price of the commodity from P1 to P2.
The primary impact of the fall in the price of coal can be seen in the Australian market in
the form of mining shutdowns. For instance, several news of shutdown of coal mines has been

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evident during last few years. According to Janda (2014), Glencore closed its coal mines for a
month due to the fall in the demand for the commodity. The falling price of coal has become a
major challenge for the coal producing firms to earn their breakeven costs, which is leading to
shutdown of the mines and loss of jobs in thousands.
It is important for the Australian Government to take necessary measures in order to
maintain equilibrium in the Australian coal industry. For example, the Australian government
must focus on increasing the export of coal by providing tax reliefs and subsidies to the coal
exporters. Furthermore, the government can implement the price flooring policy to maintain an
equilibrium price in the domestic market (Rademacher, 2016). Additionally, subsidies can be
provided to the mining companies to promote their operations and use better technology to
reduce their cost of production (Gilman, 2016). Hence, the Government can make use of its
fiscal policies in order to control the demand and supply of coal in the domestic market to
provide relief to the Australian coal producers.
From the above discussion, it is quite clear that cut down on the demand side from major
coal importing economies will create a significant challenge for the Australian coal mining
sector. Due to environmental policies, renewable energy resources have started to replace the
coal-powered electricity plants in several developed countries. Evidently, climate policy actions
of a number of coal importing countries have weighed on the coal mining sector in Australia.
Conclusively, the decrease in demand will certainly drive down the price of the fossil fuel in
Australia posting unmanageable challenges to the coal mining industry.

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References
Farmer, R. (2008). Aggregate demand and supply. International Journal Of Economic
Theory, 4(1), 77-93.
Forstater, M. (2017). Economics (4th ed.). London: A. & C. Black.
Gilman, L. (2016). Economics (2nd ed.). Minneapolis: Lerner Publications.
Janda, M. (2017). Glencore shuts down Australian coal mines for Christmas. ABC News.
Retrieved August 2017, from http://www.abc.net.au/news/2014-11-14/glencore-shuts-
down-australian-coal-mines-for-christmas/5890818
Palmer, G. (2014). Energy in Australia (2nd ed.). Cham: Springer.
Rademacher, M. (2016). Development and perspectives on supply and demand in the global hard
coal market. Zeitschrift Für Energiewirtschaft, 32(2), 67-87.
Richardson, G. (2013). Economic Theory (2nd ed.). Hoboken: Taylor and Francis.
Slezak, M. (2017). Energy economics group says export market for Australian coal will
decline. the Guardian. Retrieved August 2017, from
https://www.theguardian.com/environment/2017/jul/12/energy-economics-group-says-
export-market-for-australian-coal-will-decline
Wonhas, A. (2014). Australia should export more ideas and fewer greenhouse emissions. ECOS.