Global Coal Market Demand and Market Supply

Question: Discuss about the Global Coal Market Demand and Market Supply. Answer: Introduction: Coal is a necessary commodity for industrial and domestic consumption. The market demand and the market supply of coal are the main determinants of the price of coal. Price expectations by consumers also determine the price of coal to some extent. There are many reasons why the price of coal has continued to fall over the past two years in spite of the fact that coal is the main energy source of the world and is hence an essential commodity for the world economy as a whole. One of the major reasons behind this fall in the price of coal could be that due to pollution emissions, availability of cheaper substitutes like natural gas and also increased regulations, the demand for coal has dropped considerably. (Ambrose and Chan, 2016) All the major economies of the world are cutting down on their consumption of coal. This is because economic activities have slowed down in some of the coal-importing countries like India as well as China. (Gloystein, 2015) The US coal market has faced a sev ere slow down due to competitive reasons. (Topf, 2015) The global demand for coal has fallen as a result of all this and given the supply prices are declining. Even restrained supply is unable to support the price. The coal market is demonstrated in the following diagram: (Pindyck and Rubinfeld, 2012) In Figure A, the demand curve for coal shifts from DD to DD. Supply remaining constant, the fall in price is from P* to P and the fall from Q* to Q represents the fall in equilibrium quantity. This decline in the price of coal is supposed to be irreversible. (Cunningham, 2016) Effects Of Falling Coal Prices On Different Economies Countries importing coal generally benefit out of a fall in coal prices; whereas countries that export coal lose out. Effects Of Falling Coal Prices On Coal-Importing Economies Falling international coal prices have benefitted Japan and India which are majorly coal-importing countries. The demand for coal is price inelastic given that coal is a necessary commodity. This means that any change in coal prices will be followed by a less than proportionate change in the demand for coal. Consequently, when coal prices fall, the import bill of these countries also falls because demand does not change considerably. Thus, a part of the money saved out of the reduction in the import bill is now spent on domestic consumption thereby increasing the demand for domestic output. Imports are leakages from the GDP, hence when the import bill falls, the GDP of an economy increases and this leads economic growth. Falling import bills generated out of falling prices of coal reduces the current account deficits of countries importing coal and this boosts their long-run growth prospects. Japan is most likely the largest coal importer globally. Hence it benefits the most out of falling coal prices. The GDP of the country is augmented on account of generation of current account surplus. Tax and fiscal networks can also be improved as a result of this. But deflation can result out of falling coal prices which might reduce the investment on domestic energy resources. Almost all of the coal consumed by the Indian economy comes as imports because India does not specialise in the self-production of the same. Falling import bills arising out of falling coal prices affects the country in different ways. The current account deficit is reduced along with a fall in the inflation rates. Moreover, India has also cut down on the imports of coal. Thus falling coal prices is accompanied by falling demand. This leads to a considerable fall in the import bill from coal and hence the GDP of the economy is pushed up. (Gloystein, 2015) China is also a major importer of coal in the global economy. It has also reduced its consumption of coal substituting it for other cheaper and relatively less harmful energy sources. Hence, for China also, the import bill from coal has fallen. Effects Of Falling Coal Prices On Coal-Exporting Economies Falling coal prices have large scale adverse effects on the coal-exporting countries like Australia or Indonesia. Since coal demand is price inelastic, falling coal prices do not lead to considerably increased demand for coal, that is, the increase in the demand for coal is less than proportionate with respect to the fall in price. Moreover, globally, coal consumption is being cut down gradually. This leads to the reduction in export bills of coal-exporting countries. Exports form a positive component of the GDP. Hence, falling export bills adversely affects the GDP of the economy thereby reducing its growth potential. One of the biggest coal exporters in the world, Australia, has been facing falling coal prices over a considerable period of time. (Gloystein, 2015) Due to unchanged production costs the financial situation in the economy has worsened. Moreover, the vulnerability of the economy has increased due to the increased volatility of coal prices. This is because coal, a primary production contributes to the fiscal revenue. Though Indonesia is a small exporter of coal relative to Australia, yet it has been similarly affected as coal revenue forms a huge part of its GDP. However, the country is cutting down on the production of coal. The government has time and again intervened in the coal market to stabilize the coal prices. The main policy was to cut down on production if prices continued to fall. (Cahyafitri, 2014) Effects Of Falling Coal Prices Coal-Producing Countries For countries like USA or China who are themselves major producers of coal and cater to the domestic as well as global coal market, the falling coal prices have affected the domestic economy in many ways. Falling global coal prices have to be accompanied by falling domestic prices to avoid competition. This adversely affects domestic coal producers who experience a fall in the revenue from coal. However, the coal production is also being cut down gradually as coal is being substituted by natural gas and other energy sources. (Houser and Marsters, 2016) The overall effect on these economies is somewhat ambiguous. The main reason for the declining coal demand and the falling prices is the slow-down of the Chinese economy which accounted for a major part of global coal consumption. (Topf, 2015) Effects Of Falling Coal Prices On Different Industries Industries That Benefit From Falling Coal Prices Industries using coal or other coal products as their primary production inputs such as the iron and steel industry, etc will gain from a fall in the coal prices. Falling coal prices reduce costs of production in these industries thereby boosting economic growth. For example, the steel industry in the coal-importing country India has gained majorly from the falling coal prices because of the usage of blast furnace in the production of steel. (Roy, 2014) Even the power sectors which use coal as an intermediate input gain from falling coal prices. (Prithiani, 2014) Industries That Lose Out From Falling Coal Prices For the coal industry a fall in coal prices will lead to huge losses. Coal miners will incur heavy losses from these falling coal prices. Moreover, since the demand for coal is also falling, the total revenue for the global coal market is reducing and will continue to do so. Indonesia has been known to be losing out majorly from this issue. (Taylor, 2015) The lobby group of the global coal industry has been adversely hit by the declining prices as well as declining demand. (Burton, 2016) Moreover, when coal prices fall, it generates deflation in the economy, that is, prices fall. This affect several industries adversely. An estimate states that almost 65 percent of the global coal production has been incurring losses and hence coal is labelled as a loss-making industry for the global economy as a whole. (Ker, 2015) References Ambrose, J. and Chan, S. (2016). Record fall in Global coal consumption driven by low oil price. The Telegraph, [online] Available at: https://www.telegraph.co.uk/business/2016/06/08/record-fall-in-global-coal-consumption-driven-by-low-oil-price/. [Accessed 31 August 2016]. Burton, B. (2016). 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