The Oligopoly Market In Coal Mining

Introduction

Coal mining refers to the extraction or excavation of the mineral coal, from the ground (Society, n.d.). The selected news article reflects upon how the market has been stagnated with the over-supply of coal, leading to declining prices. Even though thermal exports from the country remains intact, there is a predicted shortage in the net revenue generated, from $26 billion to $18 billion by the year 2020-21. The article further identifies the reduction in revenue will eventually cost a lot of employees their jobs which may ultimately destabilize the economy. The Chief Economist’s forecast predicts the fall of thermal coal production by one-fifth of what is produced as of now, because of various changes in the global markets. Investors, mainly being equity funds are opting out from further investing in the coal markets, mainly because of numerous changes in the import policies of countries like China. Other countries are planning on shifting to other renewable sources of energy, thus, further declining the demand of coal in the global market (McCarthy, 2019). In this report, we will emphasize what market structure applies to the coal mining industry and who are its major competitors. Moreover, what is the relationship between the demand, supply and price of the product and what are the key factors that are influencing such a change? At last, what are its impacts on the global market?

Market Description

The product to be discussed in this report is coal. Coal is a fossil fuel, non-renewable in nature, formulated from the remains of dead and decayed vegetation. It was discovered in Australia in the late 1700s in the Hunter Valley which bought to light, another source of energy production (Abs.gov.au, n.d.). Australia, being one of the largest exporters of coal, have a few firms participating in the mining operations. The main players in this industry across the globe include the likes of BHP Billiton Ltd, Jindal Steel and Power, Rio Tinto, and many more (MarketWatch, 2019). Coal mining is one of the very sought-after markets which is competitive in nature. The market structure that it follows based on competitiveness is an oligopoly, which refers to a market that consists of a few competitors who share the market stake amongst themselves. In accordance with the types of oligopoly market, Perfect Oligopoly suits our chosen product as companies in the coal mining industry sells similar products in the market (Askar, EL-Wakeel and Alrodaini, 2018). There are many characteristics of the oligopoly market which are discussed down below:

· Interdependence

The oligopoly market carries a sense of interdependence amongst its suppliers in the market. The over-supplied scenario in the current market, the inter-linked firms procuring coal across the globe, have to reduce their level of supply into the already stagnating market.

· No-price competing market

Oligopoly markets carry on a standard price rigidity policy. It outlays the principle of keeping the price determinant constant the Hunter coal mine will have to face because of the limiting demand for coal export in the market. Their revenue is definite to fall, but that cannot allow them to change the price of the commodity despite the obvious earning slump.

· Blocking new firms to enter the market

The oligopoly market entertains only a few firms to compete in the market as it requires a heavy capital outlay and abiding by many government regulations. Coal mining is a market run by a few big players, which makes it a lose-lose situation for any new organizations to establish themselves in the market.

· Types of products

Firms producing the same type of products are termed as perfect oligopoly market, where coal mining firms fit perfectly. Coal mining companies produce coal.

· Uncertain demand curve

The demand curve under oligopoly markets is never exactly known, indeterminate. Firms in this market are so dependent upon each other’s production and price levels, that a slim shift in the demand curve of a competing company can create a huge impact on the other firm. Coal mining companies need to move alongside each other, because of the uncertain shift in the demand curve.

Demand and Supply Analysis

The key drivers to any decision in the world of economics emphasize the law of demand and supply. The law of demand states at what rate the consumer is willing to buy a certain product, depending upon key factors, taste; and ability to buy. The law of supply states that at what price the goods are being offered to the consumer (Whelan and Msefer, 1996). With this, we reflect upon how coal prices in the oligopoly market carry out certain shifts in the demand and supply over the years and what factors are influencing the change in the market trend, and how it impacts the economy of Australia on a country-wide scale:

· The decline in coal prices

The key reason behind the decline in coal prices in recent times is mainly because of the over-supply of the product. The last decade has seen the rise of global competition in the industry, also powered by falling investment costs in renewable sources of energy. Reducing gas prices and other less carbon-intensive sources of energy is overseeing a rapid decrease in coal prices (Reserve Bank of Australia, 2019)

· Reforming coal import policies by other countries

China and India are the leading countries for coal imports, however recent developments reflect these countries changing their import policies and strategies to help their domestic coal and energy-related industries to be dependent upon local supplies, reducing the need to import coal internationally.

· Developing local markets

The key reason to support domestic production houses for coal generation lies in profitability. India is targeting self-sufficiency in the coming times, reducing them being reliant upon any imports for the largely rising economy. The other larger countries based upon coal imports pose similar threats following the trend to develop their own production houses, leaving the largest coal exporters, mainly being Indonesia and Australia, in potential risks of dropping revenue down the lane.

· Energy transitions to other renewable sources of energy

The coal industry is on the verge of suffering from the expansion of other renewable sources of energy, mainly being solar, wind and water, which is turning to be a profitable industry for generating electricity. The costs of producing energy from the above sources are decreasing substantially, giving an opportunity to reduce the dependency of major coal importing countries, causing heavy fluctuation of coal prices in the years to come.

Conclusion

The coal industry has seen its high the past two decades, with the price rising close to 148% in the given time. Talking about Australia, coal mining has been contributing to roughly 14% of the total export revenue generated. It exports almost 382Mt of coal per year, 70% of what it produces (World Coal Association, n.d.). The recent decline in coal prices has had a drastic impact on the revenue generated in Australia as a whole, which is mainly because of the over-supplied markets and countries investing heavily to attain self-adequacy. The global trend in the coming years does not look pretty as well. Predictions discussed in the article, which estimates the export revenue to drop from $26 billion in 2018-19 to $18 billion in 2020-21. This will impact the country’s economy on various fronts, mainly being unemployment and shortage of revenue for further economic development. Global markets focusing on other sources of energy is another key reason for such an event. Despite of all this, Australia is predicted to be one of the leaders in coal export in the coming times, supported because of the quality and pricing of Australian coal.

References

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