On the basis of the demand and supply of a commodity, the price of the product or service is decided in the market. For instance, the rise in the quantity demanded keeping all other factors constant leads to an increase in the price of the commodity and vice versa (Hattwick, Brown and Sailors, 2014). In the same manner, the fall in the quantity supplied keeping all factors constant also leads to the rise in the price of the commodity and vice versa (Hattwick, Brown and Sailors, 2014). Hence, the concept of demand and supply is an effective mechanism used by the market leaders to determine the price of the commodity in a particular market.
The article of McHugh (2017) presented that the rise in the demand for electric vehicles has considerably increased the demand for copper in the global market. Moreover, a hike in the demand for copper can also be evident in the Australian economy. Hence, the copper industry has been facing a price war in the both Australian as well as the global economy. The paper has been developed to discuss the changes in the demand and supply for copper in the Australian economy and identify the impact the changes over the equilibrium price of the resource. Furthermore, the study suggests the necessary policy reforms that can be introduced by the Australian government to mitigate the problem in the copper industry.
According to McHugh (2017), the electric vehicles uses four times of the copper that have been previously used by petrol or diesel vehicles, leading to an increase in the quantity demanded from 20 kilograms to 80 kilograms. The International Energy Agency instigated the Electric Vehicle Initiative in 2009 and different countries have signed the initiative such as the United States, the United Kingdom, Australia, India, China, Canada, Japan, Korea, Germany and South Africa (Yan, Lu and Wu, 2016). In 2016, 750000 electric vehicles have been sold in the global market that makes the total estimated figures to be more than 2 million till that year (McHugh, 2017). Moreover, McHugh (2017) said that Australia is the home to Olympic Dam Copper Mine in South Australia, which is the sixth largest producer of copper across the globe. Furthermore, the rising demand for copper has made BHP Billiton to spend around $600 million in upgrading and expanding its copper mine.
The Mineral Council of Australia has predicted that the increase in demand from the electronic vehicle manufacturers and growth of renewable energy industry can contribute towards massive price hike of copper in the next few years (McHugh, 2017). Clearly, the rising price of the red metal will be a major challenge for the copper consuming industry. Furthermore, increase in domestic demand has affected the copper export as well. Evidently, an excess rise in demand of copper can also create a shortage of supply in the near future, to say the least. In Australia, the production copper is limited. Due to the high volume of consumption, undersupply of copper can impact consumers’ business costs set up as the price of the natural resource will increase on a continuous basis.
In terms of economic perspective, the theoretical concept of demand and supply can be applied to identify how surging demand of copper is contributing towards price hike. If the circumstances remain unchanged, heavy consumption of copper cam affects the market equilibrium as the economy will see a definite shortage in supply (Kim, Lee and Morck, 2009). In the underlying section, a figure has been presented to evaluate the effect of demand and supply side on the copper prices in Australia.
Figure 1: Copper Demand and Supply Curve
Source: (Forstater, 2017)
In the figure 1, it can be identified that increasing demand of the commodity has led the demand curve to shift at the right side from D to D1. Furthermore, due to supply shortage, the supply curve of the commodity has shifted to the left side from S to S1 as shown in figure 1. Due to the event, the consumption of the commodity is bound to increase from Q to Q1. At the same point of time, due to the rise in consumption, the market equilibrium changes the position from E to E1 forcing a price hike of copper from P to P1 (Forstater, 2017). In terms of elasticity of demand, another diagram can be presented to show how increase in demand can create an impact on price of copper.
Figure 2: Elasticity of Demand for Copper
Source: (Hattwick, Brown and Sailors, 2014)
In the meanwhile, the elasticity of demand for the red metal can be identified as inelastic by nature. Therefore, being a necessity for industrial use, high change in terms of pricing makes a relatively lesser effect on the demanded quantity of the metal (Xiao, Luo and Jin, 2009). Conversely, a minimum fluctuation in demanded quantity can create a massive impact on prices. As shown in figure 2, the shift of quantity from Q2 to Q1 has created a major impact on prices. Driven by the recent demand surge domestically, the copper prices will increase subsequently (Hattwick, Brown and Sailors, 2014). Therefore, it is the responsibility of the Australian government to take urgent measures to uphold equilibrium price in the free market condition. In order to eliminate the issue of the supply shortage of copper in the near future, the government must encourage discovering copper mines restructuring the existing infrastructure (Watanabe and Kusukawa, 2014). Also, the government must motivate the private sector companies to invest so that the recycling industry of copper can contribute to meet the surging demand as well (Bonnin et al., 2015). Lastly, the Australian government is recommended to consider price flooring policy so that equilibrium price in the free market can be upheld.
By considering the above analysis, it can be seen that the rising demand for electric vehicles and renewable energy appliances has resulted in a rise in the demand for copper in the Australian market. Moreover, the increase in the consumption of copper will lead to a substantial fall in the supply of the resource in the upcoming future. The Australian Government must take an initiative to explore more resources of copper in the future and use price flooring strategy to maintain equilibrium in the market. Conclusively, it can be seen that the growing demand for the resource has been a major factor leading to a rise in the price of the commodity that must be controlled in order to save the resource for future use.
Bonnin, M., Azzaro-Pantel, C., Domenech, S. and Villeneuve, J. (2015). Multicriteria optimization of copper scrap management strategy. Resources, Conservation and Recycling, 99, pp.48-62.
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Kim, J., Lee, J. and Morck, R. (2009). Characteristics of observed limit order demand and supply schedules for individual stocks. 4th ed. Cambridge, Mass.: National Bureau of Economic Research.
McHugh, B. (2017). Copper demand up due to surge in electric vehicles and renewable energy targets. [online] ABC Rural. Available at: https://www.abc.net.au/news/rural/2017-08-15/copper-demand-and-price-up-on-electric-vehicle-demand/8799106 [Accessed Aug. 2017].
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