How are investment decisions in the steam coal market affected by demand uncertainty and buyer-side market power?
AbstractDuring the last decade, China has evolved into the largest consumer by far and one of the largest importers of coal. The main driver for the increase in coal demand in China has been economic growth. Future Chinese growth rates, and therefore coal consumption and coal imports, are highly uncertain, which may a ffect proffitability of new investments of international mining companies. Furthermore, China has actively employed an array of instruments to control coal trade flows in the last years. In this paper, we analyse the potential impact of increased Chinese coal import volatility and of potential exertion of Chinese market power on global mining investment decisions. For this purpose, we develop a multi-stage stochastic equilibrium model which is able to simulate investments under uncertainty and a monopolistic player in addition to a competitive fringe. We find that accounting for Chinese demand uncertainty yields significant costs for investors and also leads to a delay in investments. Additionally, the exertion of Chinese market power further reduces overall investment activity.
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Bibliographic InfoPaper provided by Energiewirtschaftliches Institut an der Universitaet zu Koeln in its series EWI Working Papers with number 2012-3.
Length: 28 pages
Date of creation: 19 Mar 2012
Date of revision:
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Investments under uncertainty; value of perfect information; risk aversion; strategic behaviour;
Find related papers by JEL classification:
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- F10 - International Economics - - Trade - - - General
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- L71 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Mining, Extraction, and Refining: Hydrocarbon Fuels
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