Thursday, 3 June 2010

The wonders of oligopoly

Australians should perhaps be thankful that Xtrata announced today that it will not be proceeding with some major Queensland coal field developments. It was clearly tough news for a couple of hundred workers on the projects and Premier Anna Bligh is up in arms because her Government earns money on each ton exported by way of royalties and rail freight. But for the nation as a whole the absence of extra shiploads of coal might actually increase the wealth rather than decrease it.
The Australian Bureau of Statistics figures on International Trade in Goods and Services this morning give us the clue. They show that in April exports in original terms of iron ore and concentrates were up $768m (32%) on March despite volumes being up just 2% and prices up 29%. Exports of coal, coke and briquettes, on the other hand, where the value was up a comparable $790m (35%), saw volumes rise 26% and prices only 7%.
Prices in the iron ore market are clearly being influenced by the world's three major producers - two in Australia and one in Brazil - by not charging ahead too quickly in developing new mines. As good oligopolists they know that a nice little gap between supply and demand results in a wonderful improvement in the prices they obtain. By all accounts the 29% price improvement in March was just the start of the bounty to come from the still buoyant Chinese demand.
Coal on the other hand does not have the benefit of oligopoly. There are too many producers and when governments earn their revenue by the ton and not by the dollar value they are keen to promote new mines and listen to the entreaties to provide more infrastructure to get the tons to market.
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