Economic Analysis Of Wesfarmers Coal

Economic Analysis Of Wesfarmers Coal - Economic Analysis Of...

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Economic Analysis Of Wesfarmers Coal G. Francis T 1. Introduction The Wesfarmers Coal division, with mining interests throughout Australia, is part of Wesfarmers Limited, a major diversified Australian public company. They only produce thermal (steam) coal and metallurgical (coking) coal, with the latter being exported (Figure A). As shown in Figure B coking coal is priced much higher than thermal coal. The firm’s coal interests include the Curragh mine in Queensland’s Bowen Basin, the Premier Coal mine at Collie in Western Australia’s south west, and a 40 per cent interest in the Bengalla mine in the Hunter Valley of New South Wales. Before analysing the challenges, it is beneficial to examine the market Wesfarmers operates in. The marketplace for coal is domestic, with the majority exported on the global market. The coal industry can be described by the classic perfect competition model via the following characteristics (Earl & Wakeley, 2005: 226-227): • Large number of potential buyers (global market) • Large number of potential competitors. World Coal Institute estimates that recoverable coal reserves are in more than 70 countries and supply will last approximately 155 years (World Coal Institute: 2007). • Large number of current competitors. Each competitor sells a perfect substitute for Wesfarmers coal. • There is no price regulation in the coal industry. According to Earl and Wakeley (2005: 227), these characteristics would make Wesfarmers a price- taking firm which has no control of the price it charges for coal. It has to accept the price determined by market forces. This report will address the challenges facing Wesfarmers from the perspective of growth and diversity and implementation of clean coal technology. The report will also attempt to provide potential solutions. Figure A: Wesfarmers coal interests and overall coal type distribution. Source: Australian Coal Association
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Figure B: Average export prices of thermal (steam) and metallurgical (coking) coal. Source: Qld Government – Department of Natural Resources and Water 2. Implementation of Clean Coal Technology for Product Differentiation 2.1. Challenge In the current market where there is no differentiation on coal between competitors (e.g. thermal coal from Wesfarmers is a perfect substitute to Xstrata thermal coal), Wesfarmers has to accept the market price. This implies the firm faces a “perfectly elastic demand curve for its own output” ( Earl & Wakeley, 2005: 233). In the long-run (Figure 1), the Price (P) of coal will equal average total costs (ATC), therefore Wesfarmers will only realise normal profits are possible (see figure 3). With the lack of price control, Wesfarmers can attempt a product differentiation strategy with innovation in clean coal technology. Clean Coal Technology (CCT) is defined as “technologies designed to enhance both the efficiency and the environmental acceptability of coal extraction, preparation and use” (Australian Coal Association: 2007). These technologies reduce emissions,
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This note was uploaded on 01/26/2012 for the course BUSINESS BUS 520 taught by Professor Dr.mohamed during the Spring '11 term at Strayer.

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Economic Analysis Of Wesfarmers Coal - Economic Analysis Of...

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