[Analysis] Increase in Demand, Shortage of Coal

Definition of Terms
$/mt - USD (United States Dollars) per metric Tonne (1000 kg) of coal.
Economic Growth - Monetary Indicator of overall increase of national income measured by salaries, value of all outputs, and expenditures (debits, payments)
Depletion - serious or complete exhaustion of supply of a good, which is usually scarce.

Platts.com - June 22, 2008
"Coking coal prices top $350/mt as steel demand, supply uncertainty hits market"
According to Platt's annual coke coal price assessments, all variants of coke coal have increased in price primarily due to continued tightness in the metallurgical coal market.
In fact, the average increase in price is $30/mt.
Apparently, the increase also has links to the increased demand of steel bars and sheets for use in construction, consumer appliances and automobiles in regions experiencing economic growth such as Asia, Eastern Europe, and Latin America.
The mining and infrastructure constraints are limiting future export growth for the US, which already has higher average production costs than Queensland, Australia - its main competitor.
It is very possible that this bottleneck of coke coal will only get tighter as time goes on, due to the market economy's depletion of scarce resources.

Coking coal is the primary ingredient in a blast furnace to create steel. Currently, world wide steel production sets a record at approximately 119.5 million mt, or 119,500,000,000 kilograms. Without a doubt, this requires enormous amounts of coking coal; production of one mt of steel requires 630 kg of coal. This indicates a strong demand for the coal at any price. To maintain a profit margin, steelmakers have successfully raised product prices to contend with the surge of iron ore and coal costs. Despite the fact that the steel market's "excellent condition" eases the way for raw materials, these raw materials are facing depletion and, as stated before, surging prices are making the cost of production for steelmakers unbearably high. As production and resource costs rise, suppliers are forced to make a change in supply.

A rise in the price of resources in the steel making firm means that the firm must now supply fewer metric tonnes of coal at all prices, causing the supply curve to shift from the right to the left. This is a decrease in supply (see graph).

A subsequent fall in the cost of resources for production will allow the firm to increase their supply once again, shifting the supply curve back to the right.

As an alternative, and a possible combat against the rising prices, steel makers have found a partial substitute for the low-volatile hard coking coal. A new, lucrative semi-soft coking coal has higher amounts of volatile matter however yields less steel, which explains it's lower price: hard coal has an increase in price of $10/mt, and the innovative semi-soft coal had only a $2.5/mt increase.


As in these two graphs, a decrease in supply is visible for hard coal, because the new semi-soft coal has lower production prices. Suppliers always want to supply and produce what will produce the largest marginal profit. As a result, in the second of the two graphs, the supplier will increase the quantity supplied from Q to Q1, ergo raising the market price from P to P1.

The increase in price for both substitute goods can be tied to demand from steel makers to find an alternative to pricey and scarce hard coal. At the moment it is highly priced and can not be produced in high volumes. Furthermore the new, lucrative semi-soft coal does not yield the same steel output as hard coal, although at lower prices. The suppliers of coking coal are always working towards their goal to supply enough coal at lower prices to the demands of the World's industry.