The Coal Industry and Winner’s Curse.

The article from “livemint.com” called “Will winners curse the coal block auctions?” explains how the the coal industry in parts of the world is currently facing “winner’s curse”.  The article explains that coal mining firms are bidding up the cost of coal mines without any concrete current reasoning.  At best their bidding is being influenced by their future expectations for the coal industry and coal’s price.  The issue is that as the market currently stands these firms are overpaying by far too much.  Which actually creates some worries about these firms, and how solvent they will be able to remain.  Their only hope is what the future market holds, not the current market.  They are more than likely purchasing these mines hoping that in the long run they will be profitable.  Given this there does seem to be one major factor driving this irrational bidding.  This factor is that of power companies that use coal for generation.  They are the part of the industry that is most aggressive in their bidding decisions.  This aggressive behavior is what is probably causing bidders in the coal industry as a whole to become more aggressive.  Since the power companies compete in the auctions all of the other participants must also be aggressive to match them.  The issue with this is the increased price for coal, and reduced margins for companies that use coal in their production.  Given this why would the power companies be so aggressive, the answer may simply be they are expecting greater demand in the near future.  Since this is what they are expecting they must take the appropriate steps to ensure they meet this expected increased demand.  Overall, this article is quite interesting because it shows how a concept that is irrational and well known is still occurring today.  I guess there really is no way to escape the winner’s curse.

Source:

http://www.livemint.com/Money/OM2n6irhpLEipXtufIbpcI/Will-winners-curse-the-coal-block-auctions.html?utm_source=copy

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2 thoughts on “The Coal Industry and Winner’s Curse.”

  1. I hope that the bidders competing with the power companies see some profit or they will pay big time. It just does not make sense to overbid at all, but this got me thinking about market clearing prices. Since the power companies are that aggressive, then the other bidders should look for alternatives. Yet, it seems they don’t have a choice.

  2. Brian this is a great current example of a market that is facing a winners curse. Its surprising that a company would be that aggressive in bidding given how uncertain the future is. You think they would want some concrete evidence to bid since the future is so uncertain. And because of this uncertainty, these companies that are aggressively bidding are taking on a big risk as the price of coal is susceptible to fall, as we have seen in similar recent events like the oil price dropping. Although the companies are aggressively bidding for coal contracts by using their economies of scale, I believe that technology may soon surpass mine bidding and companies may not be able to bounce back from that loss of revenue. All in all I liked your article.

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