Impact Of Falling Coal Prices On Global Economy: Energy Economics And Financial Analysis

Reason for the falling price of Coal

Discuss about the Energy Economics and Financial Analysis.

The reported paper reviews the impact of falling coal prices on the global economies considering the demand and supply of the fossil fuel. Under the current circumstances, due to sluggish demand, drop in global consumption and falling crude oil prices have forced the prices of the fossil fuel to as low as $62 per metric ton in 2014-15 (Thurber and Morse, 2015). The weakening demand from the largest exporters and the global economic growth situation has significantly contributed to the falling prices of coal. Moreover, the paper has identified the critical reasons for the falling coal prices analysing the fundamentals of demand and supply of the commodity (Giraud, 2009). Also, the notable impact of declining coal prices on the coal importing, exporting and massive coal producing economies has been discussed herein providing supportive evidence (Roseman, 2009). Additionally, the impact of the falling prices of the fossil fuel of global industries has been identified showing proper argument.

Several reasons have been identified that results in the falling price of coal in the international market. It has been found that all of these factors impacts that the demand and supply of the product that further results in the fall of price over the global market (Rademacher, 2008). The major reasons that have resulted in the falling price coal ate presented below:

Reduction in the use of coal: A reduction in the use of coal can be evident with the development of bio-fuels and other less polluting fossil fuels (Rademacher, 2008). Furthermore, the increased use of electricity to run large furnaces and motors has resulted in the fall in demand for coal in the global market.

Political issues: The political uncertainties have resulted in the fall of price in the coal industry in Australia. It can be seen that the changes in the taxation policy and price floor policy of the Australian Government has highly impacted the demand and supply of coal in the market (Heilmann, Saarenketo and Liikkanen, 2013).

Environmental pollution: Environmental pollution has been a primary factor for the fall of demand and price of coal in the international market. It can be seen that there are several alternatives are create less pollution as compared to coal which have replace the commodity in the international market (Power and Brunt, 2007). Hence, it is a major factor for the fall of coal price in the Australian as well as international market.

The effect of falling price of Coal on the economies

Economic Factor: It has been evident through survey that mining of coal is quite uneconomic as compared to other fossil fuels (Heilmann, Saarenketo and Liikkanen, 2013). It has resulted in financial losses of market leaders that made them increase the price which has resulted in a negative fall in the demand.

It can be seen from the above analysis that every factor resulting in the fall of the coal price, primarily impacts the demand and supply of the commodity (Power and Brunt, 2007). It can be said that the current factors in the global market has resulted in the fall in the quantity demanded of coal and increase in the quantity supplied (Heilmann, Saarenketo and Liikkanen, 2013). Hence, the shift in the demand and supply curve has resulted in the fall of the price. A graphical explanation is given below:

Figure: Demand and Supply of Coal

Source: (Ravindra and Iyer, 2014)

It can be seen from the above diagram that the demand curve shifts from D1 to D2 because of the fall in the quantity demanded of coal in the global market. On the other hand, the supply curve shifts from S1 to S2, resulting in an increase in quantity supplied (Ravindra and Iyer, 2014). Hence, the equilibrium price P1 to P2 keeping the quantity demanded constant at Q1 or Q2.

Impact on huge coal importing countries such as Japan

The falling coal prices can be identified as one of the most inspiring economic events as the power-sector of Japan will revive from a decline situation. Under the current scenario of weak economic growth, the electricity demand in Japan declined by 2.7 percent in 2015. Meanwhile, the power sector transformation of Japan is leading to biggest coal imports at the cheapest rate. The weak prices of coal have influenced the thermal coal imports in 2015. Due to the increase in demand, the thermal coal imports rose by 4.8% to a record high of 114.145 million tonnes in 2015 (Buckley, 2016). Notably, in 2014-15 financial years, the price of coal was down to as low as $62 per metric ton due to sluggish demand and the slump in crude oil prices. As a result of the falling prices of coal, the Institute of Energy Economics Japan has predicted that the imports of LNG will be expected to decline to a record low of 79.6 million tonnes (Tsukimori and Sheldrick, 2016). Apparently, the slump in coal prices will improve the economic growth structure of Japan.

Impact on massive coal exporting countries such as Indonesia

The recent downward movement of coal prices have created significant economic issues for Indonesia as the exports of coal has significantly declined massively. Currently, Indonesia’s coal production industry is going into a deep turmoil as the ramping up production of coal has put the economy of the country in danger. In 2014, Indonesia, the world’s biggest exporter of the fossil fuel, shipped 410 megatonnes of coal to the neighbouring countries notably India and China (Coca, 2016). But, due to the global price fall of coal, shipments to China have been declined by 49% in 2015. The outlook of coal export is looking worse than ever in the next couple of years as well (Guay, 2014). As a result of the consequences, the coal-mining corporations of Indonesia are shutting down production demanding public subsidiary. Undoubtedly, the slump in the coal prices has affected the GDP growth of the country as the coal-mining industry has suffered massive losses due to decline in export of the fossil fuel.

The slump in the coal prices has triggered a significant decline in coal production in China for the first time in last fourteen years. As the supply of coal exceeds demand, one of the largest coal producer and consumer of the fossil fuel, China has forced to put a break on coal production. According to the data released by the National Bureau of Statistics of China, in 2015, the coal production of the economy has been declined by 2.5% to 3.87 billion metric ton. Similarly, the consumption of coal prices has been reduced by 2.9% due to sluggish economic growth (Yang, 2016). Clearly, the demand, supply and pricing scenario of global coal market has indicated towards the massive fall of the coal industry in China creating issues of unemployment and economic debt situation (Liu, Margaritis and Zhang, 2013).

The businesses/industries likely to benefit from the fall of coal price

The falling price of coal has primarily benefited the industries or businesses that use coal on regular basis. The major industries include steel producing firms, iron-ore factories, electricity production companies and businesses that required large furnaces that consume a huge amount of coal. These business or industries are benefitted because the fall in the price of coal results in the fall in the cost of production (Coca, 2016). Furthermore, the fall in the production cost increases the profitability of the firms. Hence, it can be said that the industries or businesses that uses coal in their daily production process are mainly benefited due to the fall in the coal prices over the global market (Soderbery, 2015).

Impact on countries with huge production and consumption such as China

Now, considering the negative side, it can be seen that the businesses or industries that deals with coal production and supplies coals in the overseas market are estimated to make a high amount of loss from the fall of coal price in the international market. The primary coal producers of Australia like Anglo Coal Australia Ltd, BMA Mines, Hunter Valley Energy Coal, BHP Billiton and Centennial Coal Company Ltd are likely to face a huge loss from the falling price of coal (Coca, 2016). It has been found that the fall in the price of coal has resulted in falling profitability of the firm. It has been found that in the recent years, several coal producing companies have shut down their production due to the immense losses (Soderbery, 2015).  Hence, it can be seen that the coal producing businesses or coal industry of Australia is highly impacted by the falling price of coal.

Conclusion

The reason for declining prices of coal is quite significant considering the global economic situation and sluggish demand of the commodity. Meanwhile, environmental sustainability is another standpoint to avoid coal in the development of industries. Understandably, the massive coal importing economies such as Japan has utilised the opportunity for the development of the power sector transformation supporting the economic growth. Conversely, large-scale coal exporters such as Indonesia have faced significant headwinds due to falling prices of coal. In the meantime, economies such as China has found the condition more challenging as the production and consumption of the fossil fuels have seemed to be declining for the first time in a long time forcing unemployment and economic debt condition.  Conclusively, on the basis of industrial development, power sector industries are significantly got the advantage whereas the coal-mining industry has faced unmanageable headwinds.

References

Buckley, T. (2016). As Japan’s Electricity Sector Evolves, Signs Its Coal Dependency Will Wane - Institute for Energy Economics & Financial Analysis. [online] Institute for Energy Economics & Financial Analysis. Available at: https://ieefa.org/as-japans-electricity-sector-evolves-signs-its-coal-dependency-will-decline/ [Accessed Sep. 2016].

Coca, N. (2016). Indonesia's coal addiction reaches new heights. [online] Southeast Asia Globe Magazine. Available at: https://sea-globe.com/19553-2-coal-indonesia/ [Accessed Sep. 2016].

Giraud, P. (2009). International coal prices. Natural Resources Forum, 13(4), pp.330-332.

Guay, J. (2014). Coal Exports Are Dragging Down Indonesia's Economy -- Is the US Next?. [online] Huffington Post India. Available at: https://www.huffingtonpost.in/entry/coal-exports-are-dragging_b_4987403 [Accessed Sep. 2016].

Heilmann, P., Saarenketo, S. and Liikkanen, K. (2013). Employer branding in power industry. Int J of Energy Sector Man, 7(2), pp.283-302.

Liu, M., Margaritis, D. and Zhang, Y. (2013). Market-driven coal prices and state-administered electricity prices in China. Energy Economics, 40, pp.167-175.

Power, C. and Brunt, B. (2007). The role of industry associations in stimulating economic development: A case study of the information and communication technologies sector in Cork. Irish Geography, 40(2), pp.184-199.

Rademacher, M. (2008). Development and perspectives on supply and demand in the global hard coal market. ZS Energ. Wirtsch., 32(2), pp.67-87.

Ravindra, K. and Iyer, P. (2014). Decentralized demand–supply matching using community microgrids and consumer demand response: A scenario analysis. Energy, 76, pp.32-41.

Roseman, E. (2009). Best Practices for Encouraging Private Sector Investment and Competition in the Power Industry. The Journal of Structured Finance, 5(3), pp.15-25.

Soderbery, A. (2015). Estimating Import Supply and Demand Elasticities: Analysis and Implications.SSRN Electronic Journal.

Thurber, M. and Morse, R. (2015). The global coal market.

Tsukimori, O. and Sheldrick, A. (2016). As Japan's oil, gas, power use stalls, coal imports hit new record. [online] Reuters UK. Available at: https://uk.reuters.com/article/uk-japan-energy-demand-idUKKCN0V30N6 [Accessed Sep. 2016].

Yang, J. (2016). China Oil, Coal Output Decline Signals More Imports to Come - Bloomberg. [online] Bloomberg.com. Available at: https://www.bloomberg.com/news/articles/2016-07-15/china-s-oil-coal-output-slides-in-sign-of-more-imports-to-come [Accessed Sep. 2016].