1
271 270 March 2011 was not a good month for uranium mining companies. An earthquake followed by a tsunami led to the meltdown of the Japanese nuclear plant at Fukushima. The Japanese government reacted by closing all 50 Japanese nuclear power stations, whilst Germany announced that it would close all its 17 nuclear power stations by 2020. The market for uranium is arguably perfectly competitive. There is a large number of mining companies producing uranium whilst there is a large number of electricity companies worldwide producing power from uranium-fuelled nuclear power stations. Following the Fukushima incident, the price of uranium fell from a high in early 2011 of $72 a pound to $35 a pound in 2014. Uranium is a homogeneous product and there is freedom of entry and exit to the uranium mining industry. Assume there is perfect knowledge in the market. On the spot market, mining companies are price takers for the ore. Economic theory would suggest that a large fall in the price of uranium would lead to a fall in output as uranium mines became loss making. This is what happened with some high-cost producers shutting their mines. Others carried on producing even though they were making losses. One estimate suggested that in 2014, half of all production was loss making. In the short run, mining companies will continue in production so long as they are at least covering their variable costs. Low prices also led to mining companies cutting their plans to expand existing mines or open new mines. However, demand for uranium is likely to rise in the future. Japan is likely to reopen its 50 nuclear reactors. In 2014, there were also 71 nuclear reactors under construction, 40 per cent of them in China. There were a further 486 either planned or proposed. Industry experts expect the price of uranium to rise in the future as a result. This will allow low-cost uranium miners to earn abnormal profits. This will incentivise mining companies to expand their operations. Source: with information from © the Financial Times 13.2.2014, All Rights Reserved. Thinking like an economist The uranium market Figure 10 World price of uranium ($ per pound) Source: adapted from Citi; Thomson Reuters Datastream; World Nuclear Association. Theme 3 - Unit 47 Perfect competition firm which realises the potential of the manager to create profits. As for the better site, the firm could sell it to another firm in the industry for a much higher price than those sites owned by competitors. Therefore the opportunity cost of the site is much higher than other sites and it is the opportunity cost, not the accounting cost, that is shown in economists’ cost curves. Key Terms Perfect competition - a market structure where there are many buyers and sellers, where there is freedom of entry and exit to the market, where there is perfect knowledge and where all firms produce a homogeneous product. Price taker - a firm which has no control over the market price and has to accept the market price if it wants to sell its product. 40 50 60 2010 30 $ per pound 2011 2012 2013 Feb 2014 Jan 70 80 Data Response Question Coal Coal is demanded worldwide mainly by coal-fired electricity power stations owned by thousands of different electricity generating companies. It is supplied by thousands of mining companies worldwide. Demand for coal is growing. However, the supply of coal has been growing at an even faster rate. The result has been that the price of coal has been falling on world markets since 2011. For the next two years, supply will continue to grow as major new mines come on stream. However, the fall in prices has led to a cut back in investment in new mines, the effects of which will be felt from 2016 onwards. In the long term, demand for coal could also fall. Coal burnt in power stations is a major source of greenhouse gas emissions. Already, curbs on greenhouse emissions have seen the amount of coal burnt fall in countries such as the UK. At the Evaluation It is important throughout your answer to use economic concepts. For there to be no coal mines in 50 years, either there would have to be no coal left to mine or there would have to be no demand at the market price. The data gives no indication that long term supply is a problem. However, it does suggest that environmental concerns and the growth of renewable energy will cut demand. Will these cut it to zero? What is likely to happen to the demand for electricity worldwide over the next 50 years as countries such as India and China continue to grow? Use a perfect competition diagram to analyse under what circumstances firms would cease to produce in the long run. In a concluding paragraph, weigh up the likelihood that coal will have no place in the energy mix in 50 years’ time. same time, costs for solar and wind energy are falling and reducing the cost competitiveness of coal. Source: adapted from © the Financial Times 21.8.2014, All Rights Reserved. Figure 11 World price of coal (shipped from Australia, $ per tonne) Source: adapted from Maquarie, International Energy Studies, Glencore. 2009 $ per tonne 10 11 12 13 14 140 120 100 80 60 40 1. Why might the world coal market be perfectly competitive? 2. Using a perfect competition diagram, explain the impact of the change in world coal prices in 2012-14 on an individual coal mining firm. 3. Discuss whether there will be any firms operating coal mines in 50 years’ time. DRAFT
