Economics 6: Analysis of Demand and Supply for Australian Coal

This report analyzes the demand and supply dynamics of coal in the Australian market, focusing on the impact of these factors on coal prices. The study highlights the influence of China's demand for coal on the Australian market, noting that a slowdown in Chinese demand can lead to a decline in coal prices. The report examines the effects of government policies, such as infrastructure spending cuts and environmental regulations, on coal demand. It uses demand and supply theory to illustrate how changes in demand affect market equilibrium, leading to price fluctuations. The analysis includes a visual representation of demand and supply curves, along with references to relevant literature. The report concludes that demand-side factors, particularly from China, are major drivers of coal price declines, suggesting the need for government intervention to support the industry. The report emphasizes the importance of understanding the interplay of supply, demand, and external factors in determining coal prices.

ECONOMICS 1
Demand and Supply of Coal in Australia
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ECONOMICS 2
The price of a commodity is largely driven by the supply and demand factors. Precisely,
increase in demand of a certain product during constant supply may lead to a surge in the price.
On the other hand, shortage in supply of a resource can lead to sudden price hike of a commodity
(Gilman, 2016). In the study, the demand and supply scenario of coal in the Australian market
has been illustrated. Furthermore, the impact of the demand-supply dynamics on the price of coal
has been determined in the study report. In the article, Cain (2017) has clarified that slowing
demand of mining commodity from China can cause the decline in the price of coal in the
upcoming year or so. In the meanwhile, bearish growth outlook of Chinese economy may affect
the demand for coal exported by Australia (Dong, Li and Lin, 2015). As a result of the effect,
people associated with the coal mining industry in Australia may face a severe challenge in near
term.
Cain (2017) has admitted that the coal price in Australia has been principally driven by
the demand from China. The government policies of China in infrastructure expenditure,
pollution control, and steel production industry have significantly influenced the demand side of
the fossil fuel. Similarly, due to demand side dynamics, the price of coal has fluctuated. Due to
the recent infrastructure spending cut and moderate property prices by the Chinese government,
coal price may face a substantial downside risk. In terms of the current price of coking coal, spot
prices of coal have declined from US$ 315 a tonne in April to US$ 150 a tonne in June (Cain,
2017). Considerably, slowing demand from Chinese economy is expected to make a further
impact on coal price as the price may slip to as low as US$ 120 a tonne by the end of 2017. Due
to subdue demand of thermal coal, the price of the commodity may trade sideways between
US$68 and US$77 a tonne (Cain, 2017).

ECONOMICS 3
It is important to note that China is one of the major importers of Australian Coal across
the globe. Hence, a downfall in the demand for coal in the Chinese market directly impacts the
quantity demanded of Coal in the Australian market. For instance, Australia is accounted for 24
percent of the total coal requirement in China (Perry, 2016). Hence, a decline for demand of coal
due to the Government policies regarding the environment will directly impact the quantity
demanded for Australian coal. Furthermore, it is important to note that the Carbon Tax Policy
implemented by the Australian Government also enforces the domestic consumers to shift to
renewable energy sources (Perry, 2016). For example, the Australian Government has taken an
initiative to provide subsidies to the firms that minimises the emission of carbon caused by the
use of coal. Hence, the demand for coal is expected to reduce in the Australian market as well.
By applying the theory of demand and supply, it can be seen that the supply of coal
remains constant due to the improvement of production technology (Bolle, 2011). However, the
fall in the quantity demanded influence the market equilibrium resulting in a fall in the aggregate
price of coal in the Australian as well as global market. A diagram has been presented herein
below for further explanation:

ECONOMICS 4
Figure: Demand and Supply of Coal
Source: (Hattwick, Brown and Sailors, 2014)
According to the above diagram, it can be seen that the fall in the global demand and
domestic demand for Australian coal leads to a leftward shift in the demand curve from D to D1.
However, the supply remains constant in the Australian as well as in the global market at S.
Hence, a fall in the quantity consumed can be evident from Q to Q1 that further results in a fall
in the price of coal from P to P1. Furthermore, it can be seen that the fall in the price of coal in
the global as well as in the Australian market has been leading to the financial losses of the coal
producers (Hattwick, Brown and Sailors, 2014). Several news of coal mine shutdown has been
published in the recent times. Hence, it is important for the Australian government to take
necessary measures in order to safeguard the coal industry of the economy (Perry, 2016). For
example, a price flooring policy can be and middlemen can be excluded from the supply chain to
maintain a balanced price in the market.

ECONOMICS 5
According to the outcome of the discussion, demand side worries from the leading coal-
importing economies such as China may affect the price of coal in the Australian market.
Evidently, the government policies of China towards infrastructure have signalled that
government spending in this sector may be reduced. Therefore, the downside risk of coal price
may keep intact to slowing demand for the fossil fuel. In the study, it is clear that demand side
factor can be termed as the major reason for the decline of the price of coal in Australia.
Conclusively, the sluggish demand for coal from China will contribute towards price decline of
the commodity.

ECONOMICS 6
References
Bolle, F. (2011). Competition with supply and demand functions. Energy Economics, 23(3),
pp.253-277.
Cain, A. (2017). Commodity prices likely to be softer, due to China. [online] Financial Review.
Available at: http://www.afr.com/news/special-reports/commodity-prices-likely-to-be-softer-
due-to-china-20170613-gwpx5w [Accessed Aug. 2017].
Dong, B., Li, X. and Lin, B. (2015). Forecasting Long-Run Coal Price in China: A Shifting
Trend Time-Series Approach. Review of Development Economics, 14(3), pp.499-519.
Gilman, L. (2016). Economics. 3rd ed. Minneapolis: Lerner Publications.
Hattwick, R., Brown, B. and Sailors, J. (2014). Demand, supply, and the market mechanism. 5th
ed. Englewood Cliffs, N.J.: Prentice-Hall.
Perry, J. (2016). Energy prices. 4th ed. New York: Nova Science Publishers.