Coal Market in UK- Five Forces Analysis of Coal Industry in United Kingdom
The coal market will be analyzed taking coal mining companies as players. The key buyers will be taken as power generation companies, and mining equipment suppliers and landowners/regulators as the key suppliers.
In the 1980’s much of the UK’s coal production was ceased, in favor of cheaper imported coal. Three-quarters of coal consumed within the UK is imported from Russia, South-Africa and Australia. However, unpredictability in the price of foreign sourced coal is causing the UK government to promote an increase in domestic coal production.
Domestic production of coal is dominated by UK Coal and the major buyers are power generation companies. The size and strength of buyers in this market grants them significant leverage and the limited potential for product differentiation for coal suppliers does little to offset this. Backwards integration is rarely viable however and a high level of dependency on such energy sources restrains buyer power which, overall, is assessed as moderate.
Suppliers in the market include mining equipment manufacturers and landowners and land regulators. The specialist nature of the former limits the range of demand for such products; however the strength of suppliers is concentrated more heavily in the hands of those who control access to regional coal reserves. When we incorporate this force, supplier power rises to moderate.
Healthy growth may attract new entrants to the coal market and the aforementioned inability to significantly differentiate coal products leaves current players more vulnerable. Through bulk production they are protected, however, by the advantages of scale economies. The threat of new entrants does not exceed moderate. Low switching costs allows buyers to shift the balance of a primary energy mix however the costs of wholesale shifts are greater.
Whilst other sources of energy hold certain benefits they remain problematic in other areas and the surge in demand for energy reinforces the role of coal. The threat from substitutes is only moderate. The size and similarity of major players in the market and the difficulty of market exit sustains competition yet it is constrained by healthy growth and a degree of geographical diversification. Rivalry is moderate.
Buyer Power
Buyers in this market are generally power generation companies. In the UK market buyers include both power companies that are exclusively involved in upstream activities such as power generation and more vertically integrated entities such as RWE Group, which both generates and supplies electricity to end users through its service provider Npower. Buyers can also be industrial and retail users. Coal companies are therefore not just selling to one or two dominant buyers, which decreases the power of buyers here. Steel companies are also buyers with coking coal used in the manufacture of steel. They are often large and highly diversified which increases buyer power.
Backward integration by buyers is also likely here as steel companies often are involved in the mining of coal too, for example BHP Billiton. Coal is an undifferentiated commodity and competition within the market is therefore largely driven by price. However, coal is a vitally important product to buyers in this market and as a result buyers are highly reliant on market players. Overall buyer power in this market is moderate.
Supplier Power
Key suppliers in this market include producers of mining and production equipment. In general, supplier power is weakened by the fact that the metals and mining market is important to supplier revenues, as mining equipment is highly specialized. Backward integration is unlikely as market players and buyers operate in distinctly different industries. Innovation in the technology and equipment for mining allows suppliers to differentiate their services and establish some loyalty with market players. Overall supplier power is moderate.
New Entrants
A sharp increase in the internationally traded price of coal in recent years has increased the viability of domestic coal production, triggering mine re-openings and the opening of new mines within the country, increasing the potential for new entrants. However, Capital outlay in coal mining is extremely high with investment needed in expensive equipment, specialized techniques and the initial purchase of mines.
Costs in this market are high, the main outgoings being transportation and energy which have both faced increased prices in recent years. This increase in expense makes new companies less likely to enter. Stringent environmental regulations are increasingly putting pressure on the production of coal and it is becoming increasingly expensive for companies to comply with such regulations.
Coal is said to be the most environmentally damaging fossil fuel. The European Commission has introduced an Emissions Trading Scheme (ETS) restricting the amount of emissions that are allowed to be produced. However coal conversion technologies such as coal-to-liquids and coal-to-gas are expected to create new markets for coal supplies which could encourage new entrants. Overall the threat of new entrants is moderate.
Substitutes
Coal has several substitutes in the power generation market: oil, gas, nuclear fuels, etc. These can be seen as quite a strong threat with the current emphasis on utilizing more environmentally friendly fuels. Other substitutes include wind power and solar power which again are more beneficial for the environment but would involve high investment for traditional power generation companies aiming to make the transition to these substitutes.
However, the implementation of clean coal technology (CCT) strategies, such as carbon capture and storage (CCS), within coal fired power stations, may decrease the environmental impact of using coal and reduce the threat of more environmentally friendly substitutes moving forward. The threat of substitutes overall is viewed as moderate.
Rivalry
Domestic coal production is dominated by UK Coal. Increasing demand for domestically mined coal is increasing the domestic market, thus reducing rivalry between existing players. High fixed costs and the prevalence of physical assets in this market mean that exit barriers are high, increasing rivalry in the market. Overall rivalry in this market is moderate.
Market Analysis
The UK coal market has shown fluctuations in its growth rate over the past few years, although it has shown a healthy growth rate in 2008, it will continue to fluctuate over the forecast period.
The UK coal market generated total revenues of $5.4 billion in 2008, representing a compound annual growth rate (CAGR) of 10.2% for the period spanning 2004-2008. In comparison, the French and German markets grew with CAGRs of 7.2% and 8.9%, respectively, over the same period, to reach respective values of $2.4 billion and $26.4 billion in 2008.
Market consumption volumes decreased with a compound annual rate of change (CARC) of -0.3% between 2004-2008, to reach a total of 66.1 million short tons in 2008. The market's volume is expected to rise to 69.1 billion short tons by the end of 2013, representing a CAGR of 0.9% for the 2008-2013 period.
The power generation segment proved the most lucrative for the UK coal market in 2008, generating total revenues of $5,262.4 million, equivalent to 96.8% of the market's overall value. In comparison, the industrial steam segment generated revenues of $173.5 million in 2008, equating to 3.2% of the market's aggregate revenues.
The performance of the market is forecast to decelerate, with an anticipated CAGR of 3.6% for the five-year period 2008-2013, which is expected to drive the market to a value of $6.5 billion by the end of 2013. Comparatively, the French and German markets will grow with CAGRs of 1.1% and 3.2%, respectively, over the same period, to reach respective values of $2.5 billion and $31 billion in 2013.
