Australia Floods Cut 5 Percent of World Coking Coal Supply

SYDNEY/PERTH (Reuters) – Australia’s devastating floods could remove over 5 percent of steelmaking coal from world markets this year and lift prices by a third or more, analysts estimated on Wednesday, as damage and disruption to coal infrastructure continue to spread.

Australia’s Bowen Basin coal district, the heart of the coking coal industry in Queensland state, is slowly emerging from floods that have since raced south, but recovery has been slow, with one Queensland coal port closed and two restricted.

More than half the world’s metallurgical coal exports come from Australia, most of it destined for steelmakers in Asia. Roughly 90 percent of that coal comes from Queensland, mostly the Bowen Basin.

Commonwealth Bank of Australia (CBA) in a report said the floods could remove nearly 14 million tons of coking coal from world markets, and that figure could rise if rains returned to the Bowen Basin.

That is over 5 percent of global coking coal exports, forecast to come in at 259 million tons in 2011, according to government forecaster Australian Bureau of Agricultural and Resource Economics and Sciences.

CBA also said it expected the emerging supply shortfall to drive contract coking coal prices 30 percent higher to $293 a ton in the second quarter from around the $225, free on board, being charged by BHP Billiton to Japanese customers in the current quarter.

“Open-cut mines are flooded, mine roads and railways are underwater and/or washed out,” the bank said in a report.

“Full recovery will take months and that assumes rains stop, despite another two to three months of the wet season to go.”

Energy consultancy Wood Mackenzie sees hard coking coal spot prices exceeding $400 per ton.

Deutsche Bank has revised up its overall fiscal 2011 hard-coking and soft-coking coal prices by 22-25 percent.

Hard coking coal spot prices reached a peak of $350 to $375 a ton in 2008, the last time Australia’s collieries faced serious flooding.

The impact from flooding so far on thermal coal markets is less dramatic. CBA estimates 3.6 million tons — less than 2 percent of total Australian output last year — will be lost.

But with some thermal coal exports being diverted to meet demand for metallurgical coal, thermal prices are also on the rise, with prices up $10 overnight to the highest in a year.

Thermal prices could meet or exceed the high of $197 per ton free-on-board Newcastle seen in 2008, according to Wood Mackenzie.

Showers are forecast for the rest of this week around the Bowen Basin coal centers of Emerald and Rockhampton, but the heavy rains have passed and clear skies are expected by the weekend.

Coal exports could pick up in the second quarter if rains abate, according to UBS.

But because coal miners were already operating at full capacity before the floods, “there’s only a return to where we were, no catch-up,” it said.

Australia’s largest coking-coal export terminal, Dalrymple Bay, has only operated at 60 percent of normal volumes so far in January and is concerned inventories of coal held by mines will run out.

Following the wettest November and December on record, more than 40 mines suspended operations.

Even as floods began receding in the Bowen Basin this week, the coal sector suffered more setbacks as rains flooded another rail line further south and forced more colliery closures.

Australian ports and rail operator Asciano said on Wednesday it would review its coal division revenue forecast, adding that coal haulage in New South Wales state, south of Queensland, was also hit by congestion and restricted availability of material.

New South Wales accounts for most of Australia’s thermal coal exports, which are used to fuel power stations.

Asciano’s larger rival and top coal transporter QR National has shut some lines and warned of major disruptions.

One of its key rail corridors, the Blackwater line, remained inaccessible for inspection, a QR National spokesman said.

“There are still some parts underwater so until they are all above the water line we won’t be able to inspect them properly,” he said.

Unlike rail and mining-services companies, the coal-mining companies would be compensated by surging coking coal prices as Asian steelmills chase alternative supplies.

CBA calculates that 10.3 million tons of coking coal may have already been removed from seaborne markets, with alternative supply from the United States and Canada replacing to only a “small extent” the lost Australian production.

The Appalachia region of the United States is the world’s second-largest supplier of coking coals after Australia.

Australian Floods to Hit Coal Production for ‘Months’

Jan 1, 2011. It will be “some months” until coal mines affected by floods in Queensland are fully operation, the state’s mining minister Stephen Robertson has said.

Operators of about 40 mines have been affected by the floods.

Queensland produces mostly coking coal used for steel making, but also produces thermal coal used in power stations.

And there are concerns the floods will see the price of coal rising – pushing up the cost of steel and electricity.

However, Mr Robertson tried to play down those concerns.

“You’ll see a jump in spot prices but for our major market predominately long-term contracts are in existence at fixed prices,” he told the BBC’s World Business News.

“So one would not expect to see significant long-term price impacts, but there will be a spike in the short term, one would expect.”

Coal worth about 100m Australian dollars (£64m; $99.7m) was usually shipped out of Queensland ports every day, he said.

“Every day that those ports are not working to capacity it’s not just a hit on the coal companies themselves but on the economy of Queensland more generally because we extract significant royalties from the mining of coal,” he said.

“It’s going to take some months to come back fully online.

“At the present time about 40 mines are affected and, whilst they have authorisation to start pumping some water out into nearby rivers and creeks, it’s going to take some time before those mines get back to full production.

“It’s hoped those mines will recover and start producing coals and minerals in the next few weeks but of course if it keeps raining that might be extended.”

The Queensland floods have led to the temporary closure of mines that account for 8% of global thermal coal exports, ANZ Bank analyst Mark Pervan has said.

Mines with an annual capacity of 57.3 million tonnes of thermal coal have either declared force majeure or have reduced production because of the rains, he added.

Sites operated by Rio Tinto, Xstrata and Vale are among those to have been affected.