Research On Coal Trade In Asia And The Pacific Region

Coal is the second most important primary source of energy only behind oil.Coal is mainly used for electricity generation,heat,and powering factories and plants.According to the International Energy Agency,as of 2011,hard coal made more than 30% of all electricity generated in the world.Major coal producers in the Asian Pacific market include Australia,China,Indonesia,Philippines Vietnam,India,Russia,and South Africa.The major coal consumers include China,Japan,India,Taiwan,and South Korea.Some countries produce coal domestically and yet import coal;these countries include China and India,thus making them both producers and importers.The supply side of the Asia Pacific region is dominated by Australia,Indonesia and South Africa which supply the most coal while the demand side is dominated by China,India and Japan.I began my work by first studying actual trend of coal trade in the region,then I use optimization methods to try and find out the optimal level of trade flow i.e.that which maximizes profits for the exporting countries and remain the most economical import combinations for the importing countries while taking into account coal price and transportation cost as constraint conditions.A Spatial Equilibrium Model(SEM)for coal trade is built with the use of GAMS software to help analyze the interaction of demand and supply among major player countries while taking into account the trade constraints such as transport costs and distance.The model produces the optimal supply and demand capacities for each country,and uses these results,together with price and transport cost constraints to develop the optimal trade flow between the demand region and supply region.Demand and supply for coal represent Import and export of coal respectively.The equilibrium condition for SEM's is that,for trade to take place between any pair of trading countries;demand price in the demand region must equal the sum of supply region's price and transport cost thus,the objective of the Spatial Equilibrium Models(SEM)is to minimize the difference between demand price and the sum of supply price and transport cost.Another minor objective of this thesis is to examine how countries? economic size influences their ability to trade in coal.In order to accomplish this objective I will employ a popular economic model called Gravity Model.The gravity equation as a tool of explaining bilateral trade patterns was originally proposed by Tinbergen back in 1962(Tinbergen 1962).He is the first one to apply this model to International trade flows.Tinbergen was convinced that the role of size of the two distant masses and the distance between them as explained in the Newtonian Law of gravitational force could also be useful to explain bilateral trade flows between two distant countries.The gravity equation in its simplest form postulates that bilateral trade between two countries is directly proportional to economic size of the trading partners and inversely proportional to the distance between them thus resembling the famous Newton's gravity law.The optimization results show that for the eight years for which this study was conducted,not even one country has been able to conduct coal trade at optimal level.Countries from supply region exported less than their optimal supply capacity throughout the study period.The same is true for demand region which also imported less than they could.As I compare optimal to actual trade flow,I notice there is a big mismatch,most of which can be attributed to price differences(Figure 5-4A and Figure 5-4B,Figure 5-5A and Figure 5-5B),and change in domestic policies.Indonesia for example,its actual trade is lower than the optimal level which means that Indonesia did not meet its optimal supply capacity.2015 results indicate that Australia's actual trade was around 380,000 mil tons when the optimal level was over 400,000 mil tons(Figure 5-4B).The demand side also exhibited under performance i.e.Results indicate that China,India,and South Korea have performed below their optimal trade level for 2008(Figure 5-5A and Figure 5-5B).China for example,had a capacity to import more than 50,000 million tons for 2008 alone,but only imported about 35,000 mil tons.India as well has the capacity to import nearly 170,000 million tons but it imported lower than 150,000 million tons.South Korea as well did not reach its optimal level of trading.Most of this deviation is attributable to price.Price being an incentive to a supplier determines the amount of merchandise a supplier is willing to offer for sale.Indonesia could have exported more coal in 2008 if the importing countries were willing to buy coal at the optimal price of 101 USD per metric ton.At this price,Indonesia would have shipped the optimal supply close to 269,315 millions of metric tons(Figure 5-4A and Figure 5-6A)as compared to only 179,543 which was actually exported.Australia on the other hand,made more exports in 2008 by exporting at lower than the optimal price.Results also indicate that Australia traded at 49 USD/Metric ton when it should have traded at 110 USD/Metric ton(Figure 5-6A),this is the reason why Australia's actual exports for this year were higher than the optimized quantities.Russia and South Africa's actual prices were not very far from their optimal levels;this can also be observed from both price comparison and optimal capacity comparison(Figure 5-6A and Figure 5-4A).Australia's actual coal exports for 2015 were lower than the optimal exports because the market was only willing to offer a price of 57.5 USD/Metric ton as compared to the optimal price of 65.87 USD/Metric ton for that year(Figure 5-6B).As a result,Australia was only willing to supply 382,115 metric tons which is lower than its optimal supply capacity of 413,690 metric tons for that year(refer to figure 5-4B).Indonesia exported 152,665 metric tons at a price of 71 USD/metric ton which is lower than its optimal supply capacity of 183,198 metric tons at a price of 79.91 USD/Metric ton.The same reason of price mismatch appears to explain this difference for the remaining countries as well.The Gravity model results indicate that the economic size of a coal importing country determines its coal trade;countries with bigger economies have more energy needs than smaller economy countries thus making them import more coal than smaller economy countries.The positive coefficients for GDP's(Table 5-7A to D)indicate that as economies rise,its coal imports also rise.This result was the same for all four importing countries under study.Another analysis show that countries which are geographically close to each other tend to trade more than those which are geographically distant regardless of the price difference.This is exhibited by the negative coefficients for the Distance variable(Table 5-7A to D).