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How are investment decisions in the steam coal market affected by demand uncertainty and buyer-side market power?

Moritz Paulus ()

No 2012-3, EWI Working Papers from Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI)

Abstract: During 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.

Keywords: Investments under uncertainty; value of perfect information; risk aversion; strategic behaviour (search for similar items in EconPapers)
JEL-codes: C61 F10 L13 L71 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2012-03-19
New Economics Papers: this item is included in nep-ene
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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