Economics- DEMAND AND SUPPLY ANALYSIS OF COAL

SIMSREE

DEMAND AND SUPPLY

ANALYSIS OF
COAL

Submitted to:
Prof. Swaha Shome
Submitted By:
ASHUTOSH SINGH(M1047) VIPUL AROH(P1001) ALOK KUMAR

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Economics- DEMAND AND SUPPLY ANALYSIS OF COAL

Acknowledgement

It is our privilege to present this Study Project Report to SIMSREE. The Report is based on
the project entitled “DEMAND AND SUPPLY ANALYSIS OF COAL”.

This edition bears the imprint of many people. This acknowledgement is a humble attempt to
earnestly thank all those who were directly or indirectly involved in the completion of the
project and were of immense help to me.

We are grateful to our Economics Faculty, to Mrs. Swaha Shome for her valuable guidance
and explanation of concepts and giving us this wonderful opportunity to learn and understand
the practical significance of Demand and Supply analysis. To know in detail about what
exactly is the situation like in the real life world gave us an opportunity to apply what we
have been taught in the class.

We would also like to mention that the regularly updated books and the reference material
available in our college library have provided excellent help. And for this timely assistance,
we would thank the college library staff.

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Economics- DEMAND AND SUPPLY ANALYSIS OF COAL

TABLE OF CONTENTS
No. Chapter Page no.

1 INTRODUCTION 4
2 DEMAND ANALYSIS 5
DEMAND SCHEDULE 5
DEMAND CURVE 6
FACTORS INFLUENCING DEMAND 8
3 SUPPLY ANALYSIS 11
SUPPLY SCHEDULE 11
SUPPLY CURVE 12
FACTORS INFLUENCING SUPPLY 13
4 EQUILIBRIUM 14
5 ELASTICITIES 17
6 PRICE BAND MECHANISM 19
7 CONCLUSION 20
8 BIBLIOGRAPHY 20
9 CASE STUDY 21

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Economics- DEMAND AND SUPPLY ANALYSIS OF COAL

1. INTRODUCTION:

Coal, a fossil fuel, is the largest source of energy for the generation of electricity worldwide,
as well as one of the largest worldwide anthropogenic sources of carbon dioxide emissions.
Gross carbon dioxide emissions from coal usage are slightly more than those from petroleum
and about double the amount from natural gas.[1] Coal is extracted from the ground by
mining, either underground or in open pits. 25% of the world’s energy consumption is
supplied by coal. The economy and industrialised society rely heavily on the supply of coal
Coal has many uses in many different markets and industries. So changes in the global price
of coal inevitably have an effect on the microeconomics of particular sectors of the economy.
The main uses for coal are as follows:
A) Used as a solid fuel to produce electricity and heat through combustion
B) Metallurgical coke is used as a fuel and as a reducing agent in smelting iron ore in a blast
furnace.
C) Cooking/heating purpose
D) Coal can also be converted into liquid fuels such as gasoline or diesel by several different
processes
E) Refined coal is the product of a coal-upgrading technology that removes moisture and
certain pollutants from lower-rank coals such as sub-bituminous and lignite (brown) coals.

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Economics- DEMAND AND SUPPLY ANALYSIS OF COAL

1. DEMAND ANALYSIS:
In demand analysis, we will see demand schedule, demand curve and factors affecting
the demand curve

Growth in Supplies

India now ranks third amongst the coal producing countries in the
world. Being the most abundant fossil fuel in India till date, it
continues to be one of the most important sources for meeting the
domestic energy needs. It accounts for 55% of the country’s total
energy supplies.

Through sustained increase in investment, production of coal

increased from about 70 MT (million tonnes) (MoC 2005) in early
1970s to 382 MT in 2004/05. Most of the coal production in India
comes from open pit mines contributing to over 81% of the total
production while underground mining accounts for rest of the
national output (MoC 2005). Despite this increase in production, the
existing demand exceeds the supply. India currently faces coal
shortage of 23.96 MT. This shortage is likely to be met through
imports mainly by steel, power, and cement sector (MoC 2005).
India exports insignificant quantity of coal to the neighbouring
countries. The traditional buyers of Indian coal are Bangladesh,
Bhutan, and Nepal.

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Economics- DEMAND AND SUPPLY ANALYSIS OF COAL

The development of core infrastructure sectors like power, steel,

and cement are dependent on coal. About 75% of the coal in the
country is consumed in the power sector (MoC 2005) and even the
other substitute of coal such as oil, fossil fuel and other substitutes
of coal such as wind and tidal energy are though less in carbon
emission still can’t replace the usage of coal completely ever
because of its cost as well as the easy availability. There are
different types of coal and there production in the world.

WORLD COAL PRODUCTION(NORTH AMERICA,

CENTRAL & SOUTH AMERICA, EUROPE,
EURASIA, MIDDLE EAST, AFRICA, ASIA AND
OCEANIC.
As we can see below the production of coal from the year 1986-2006 is throughout constant.
This shows that despite of various substitutes and rise in the price of coal in those 20 years
the production has been constant which shows that coal despite of its features of extra
pollution making (carbon emission, heating the environment, ash content) cannot be replaced
easily because its easily available and used very conveniently Its usually seen that things or
commodities easily available have low demand and less value but this product is exception to
this theory.

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Economics- DEMAND AND SUPPLY ANALYSIS OF COAL

Factors affecting demand of coal:

Demand can be defined as "the desire backed up by the ability to pay that a consumer has for
a commodity". Following factors drive demand for coal:

• The price of coal

• Income (growth in GDP)
• The availability of substitutes for coal
• The availability of complimentary substances which can be used in
combination with coal
• Consumer preferences
• Technological change
• Governmental Activities

An understanding of these factors is critical to an analysis and prediction of demand for coal.
Demand can be measured and analysed at different stages of use. coal demand can be
measured during the following stages of beneficiation:

• Fabrication of refined platinum and platinum products

• Manufacturing of platinum products (i.e. mints, auto-catalyst
producers, jewellery manufacturers etc.)

Consumption of final coal products

DELIVERED COAL PRICES,2000-2009(per short ton)

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 Economics- DEMAND AND SUPPLY ANALYSIS OF COAL

DEMAND OF COAL (PER SHORT TON)

DEMAND OF COAL

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Economics- DEMAND AND SUPPLY ANALYSIS OF COAL

The above two diagrams represent the various prices of the coal in various sectors
and their demand rather we can say that the coal being used for various different
purposes such as for generation of electricity, coke plants, residential & commercial
and other industrial & commercial purposes and also the export and import prices can
be seen from the year 2000-2009.

Demand curve is a relationship between the price of a good and the quantity
demanded, where demand solely depends on prices. While plotting the curve, it is
assumed that all the other factors affecting the demand are kept constant.

However in real life, it is not possible to keep all the other factors constant. There are
several other factors which plays important role in determining the demand. We have
explained those factors in detail in later part of the report.

In practical situation, those factors keep on changing continuously. Because of all those
factors the demand and price relationship shifts from ideal.
The charts above shows that the demand is continuously increasing or remains
constant(depending on the sector uses) in spite of increase in prices.Since 2000 to 2009 the
prices in all the sectors have almost risen to 200-300% still the demand of coal is rising and
also the import &export shows the various requirement of coal has also risen globally Variety
of factors is responsible for the increase in the demand, like increase in population, growth in
global economy, non-availability of close substitute, etc.

The Indian backdrop

The Indian mines are also full of mines and make the miners earn a lot. So having positive
side it has a negative side also that is the mining makes the life of people living nearby bad
(pollution) thus government has imposed recently the taxes on mining that is they are asked
to give 26% of the profit to the people of that place.

Some things are good and some things are bad. for example the Indian mines are rich of coal
but are rich in ash content as well which makes it less desirable as compared to other

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Economics- DEMAND AND SUPPLY ANALYSIS OF COAL

countries coal to the industrialists hence large amount of coal being imported but still the
Indian mines coal are rich in demand in open market for people using raw coal in things like
making bricks. Iron manufacturing products. And not only this, the Indian market is one of
the biggest black-market of coal.

c. Factor Influencing the Demand Curve:

Apart from its own price, there are several other factors that determine the nature of the
demand curve for coal which are as follows:
Price of close substitutes and complements: Substitutes can be classified as short term,
medium term and long term substitutes. Though there are no short term or even long term
substitute of coal because irrespective of the low prices of some substitute usage of coal
cannot be stopped because maximum industrialists use coal basically soft coke and though it
releases lot amount of pollution yet people instead of switching are finding alternative ways
like installing machines which convert the heat released from the chimney (by the usage of
coal) into electricity and then that electricity is used for further industrial purposes. In the
long run coal can be substituted by crude oil but still it would require huge amount of
investment and even solar energy would substitute it but that is far way to come.

The income of consumer: As income increases buying potential of consumer increases and
hence demand increases. If we see last 9-10 years if we see the per capita income globally
has increased considerably, standard of living of the people have increased hence this makes
the consumers to buy more irrespective of the rise in prices of the coal, this happens also
because people requirement have increased thus resulting in more production of industrial
goods hence more requirement of coal.

Existing wealth of consumer: The developed and developing countries which are growing
at faster rate are able to absorb the increase in prices due to their existing wealth. However,
huge increase in prices will start eroding wealth of the countries, which will reduce the
demand.

Changes in tastes and preferences of consumer: This doesn’t affect the demand curve of
COAL. Because industries, basic requirement (cooking) doesn’t affect the demand of coal it
has to be used some way or the other.

Population: Population increase in developing countries like India and China, has also
helped in increasing the demand even though prices are rising because due to increase in
population more of the energy is consumed in whatever way hence the prices rise and
demand also rise.

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Economics- DEMAND AND SUPPLY ANALYSIS OF COAL

Subsidies also play an important role in demand of coal. The increase in subsidies will
increase the demand of coal and vice-versa. Many countries give subsidies on coal
(LINKAGES) so that consumers in lower income group could afford the prices and also to
boost the growing small scale industries. Hence even if price increases the demand does not
reduce significantly.

SUPPLY ANALYSIS
In supply analysis, we will see the supply schedule, supply curve and factors affecting the
supply curve.
For analysis we have considered the data for year 1999-2009.

A. Supply schedule:
The supply schedule is represented by table which shows how the quantity supplied of coal
varies with the price.

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Economics- DEMAND AND SUPPLY ANALYSIS OF COAL

For Year 2003-2008 the below trend was observed in supply of coal:
The below mentioned data is for the top 10 coal producing countries.

Production of Coal by Country and Year (million tonnes)

Country 2003 2004 2005 2006 2007 2008 Share

(Percentage)
China 1722.0 1992.3 2204.7 2380.0 2526.0 2782.0 42.5
USA 972.3 1008.9 1026.5 1053.6 1040.2 1062.8 18.0
European Union 638.0 628.4 608.0 595.5 593.4 587.7 5.2
India 375.4 407.7 428.4 447.3 478.4 521.7 5.8
Australia 351.5 366.1 378.8 385.3 399.0 401.5 6.6
Russia 276.7 281.7 298.5 309.2 314.2 326.5 4.6
South Africa 237.9 243.4 244.4 244.8 247.7 250.4 4.2
Indonesia 114.3 132.4 146.9 195.0 217.4 229.5 4.2
Germany 204.9 207.8 202.8 197.2 201.9 192.4 3.2
Poland 163.8 162.4 159.5 156.1 145.9 143.9 1.8
Total 5187.6 5585.3 5886.7 6195.1 6421.2 6781.2 100

Production of coal from 1999 to 2008 globally versus price:

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Economics- DEMAND AND SUPPLY ANALYSIS OF COAL

Year Price Supply(in million

tonnes)
1999 23.90 4902.4
2000 24.47 4893.5
2001 25.25 5162.0
2002 28.57 5274.8
2003 30.56 5666.9
2004 33.58 6222.8
2005 36.67 6542.2
2006 35.70 6769.4
2007 39.32 7046.9
2008 41.50 7271.7

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Economics- DEMAND AND SUPPLY ANALYSIS OF COAL

B. Supply Curve
Supply curve is a relationship between the price of a good and the quantity supplied,
where supply solely depends on prices. While plotting the curve, it is assumed that all
the other factors affecting the demand are kept constant.

The supply plot shows an increase in supply as price increases; however there are
constraint and regulation on the amount of supply increase. Hence supply can only be
increase to certain extend.

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Economics- DEMAND AND SUPPLY ANALYSIS OF COAL

C. Factors Influencing Supply Curve:

1) Price of the good: As price of coal is increasing, we can see increase in its supply.
China which controls approximately 42% of the coal supply reduces the supply when
prices start falling thus regulating the supply and in turn its price.

2) Prices of other goods: Prices of the substitutes like natural gas, crude oil, and nuclear
energy do not affect supply in short term however it affects supply in long term.

3) State of technology: Technological change in coal extraction affects the costs of

extraction and profitability of extracting and then refining the coal thus increases the
supply.

4) Limited source of energy: As coal is limited source of energy hence its extraction is
done keeping future in mind.

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 Economics- DEMAND AND SUPPLY ANALYSIS OF COAL

EQUILIBRIUM:

The equilibrium price is that price at which total demand for coal in the market is equal to
total supply of coal in the market. If we plot price along vertical axis and market demand and
market supply along horizontal axis, we get market demand and supply curves. The point of
intersection of these two curves represents equilibrium point and price corresponding to the
point is equilibrium price and quantity corresponding to the point is equilibrium quantity.
Supply Curve

Equilibrium
Price

Demand Curve

Demand and Supply

Effect of shift in the Supply And Demand on Equilibrium:

Demand Curve
Supply Curve
Price

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Economics- DEMAND AND SUPPLY ANALYSIS OF COAL

Demand and Supply

The graph shows supply and demand curve for coal. The supply and demand have been
increasing over past 20 years at about same rate. Over these years the supply and demand
curves have shifted towards right as shown in the above figure.

Demand Curve
Supply Curve
Price

Demand and Supply

But recently supply hasn’t increased and curve hasn’t moved towards right anymore while
demand has continued to increase, resulting in shift of demand curve towards right. This has
resulted in higher equilibrium price as shown in the above figure.

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Economics- DEMAND AND SUPPLY ANALYSIS OF COAL

Demand Curve
Price

Supply Curve

Demand and Supply

Once we reach ‘Peak Coal’, we will have decrease in supply and supply curve will move
towards left as shown in the above figure. This will result in increase in prices such that
demand will be destroyed and demand curve will move quickly towards left as shown in the
figure below. This will result in decrease in price level.

Demand Curve
Supply Curve
Price

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Economics- DEMAND AND SUPPLY ANALYSIS OF COAL

Demand and Supply

Eventually supply will move faster to the left than demand is moving to left or demand will
move to right. Prices will increase again and the cycle will continue.

ELASTICITIES:

a) Price Elasticity of Demand:

The price elasticity of demand (PED) is the relation between the change in the quantity
demanded of a good and the change in the price of that good. The PED for coal is very low,
since a major increase in price is required for the demand of coal to be significantly altered.
As the demand for coal in the industrial sector doesn’t get affected because of a slight change
in price, the demand for coal is highly inelastic. Even in the long run the changes in price are
due to inflation and if this factor is taken into consideration there is proportionate change in
demand.
b) Price Elasticity of Supply
The price elasticity of supply (PES) measures the responsiveness in the supplied quantity
of a good to the change in its price. Just as the demand for coal, the supply of it is very
inelastic. This is because of the main factor that coal doesn’t have any close substitute as
far as industrial production is concerned. We cannot increase supply of coal like other

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Economics- DEMAND AND SUPPLY ANALYSIS OF COAL

commodities. The only way for producers to change their production according to price is
to expand or diminish production. This way of increasing supply, however, does only
have any effect in the long run, since building more platforms takes time.
c) Cross Price Elasticity:
The cross price elasticity of coal with respect to crude oil, natural gas and nuclear energy are
almost zero in short term. But in long term cross price elasticity is greater than zero but less
than one, i.e. as the price of crude oil, natural gas and nuclear energy gas increases, the
quantity demanded of coal also increases. But percentage decrease in quantity is less than
percentage increase in price.

d) Income elasticity:

Coal is income inelastic i.e. its income elasticity is less one than but greater than zero. As
income of consumer increases, the percentage change in demand of coal is less than
percentage increase in income.

e) Advertising elasticity:

Advertising elasticity of demand is change in consumption of coal that results from

percentage change in advertising spent on it. As coal is one of the modes of energy, it is a
necessary good. Hence, advertising has very little effect on its demand, supply or price.

CONCLUSION

As per the analysis done on coal, we can quite clearly see that coal is a quite inelastic
commodity. As it is a very important natural resource, its demand and supply are not affected
in a major way by the change in prices and income as it is a necessary and essential raw
material in a number of different industries. The demand of coal has not actually fallen but it
has plateaued in the past 6-7 years because of the stress laid on environmental policies by
various companies and governments all over the world. Coal is a very big contributor to the
pollution and thus many companies are trying to move to greener options. This has led to
stagnation in the demand.
Supply of coal too is quite inelastic as it is not easy to increase the production of the
commodity. A few new mines have been found but the production levels have almost

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Economics- DEMAND AND SUPPLY ANALYSIS OF COAL

stabilized all over the world. Also, the demand in western economies has started to fall but
this is counter-balanced by the higher demand in developing countries such as China and
India. If the current GDP growth rate of 8-10 % has to be maintained by these Asian giants,
they will keep consuming coal at a high rated and the demand is not going to fall drastically
any time soon.

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