Australian Floods Hit Coal Exports as Rising Prices Compound China's Cost Woes

Australia has been hit by once-in-fifty-year floods, according the Australian Prime Minister Julia Gillard, as an area equivalent to France and Germany combined has been submerged under floodwater up to 30 feet deep in places, as this map from the LA Times illustrates.

Source: LA Times

A Bloomberg article covering the disaster says miners including BHP Billiton Ltd., Xstrata Plc, Rio Tinto Plc and Peabody Energy Corp. are experiencing problems fulfilling contracts, suggesting many will declare force majeure this week.

Flooded open-pit coalmines and washed-out rail lines in Queensland have seen exports severely impacted, a Reuters report states. The major Queensland coal port of Dalrymple has resumed some operations, but there were nearly 50 ships offshore waiting to be loaded, while the port of Gladstone was operating at a greatly reduced capacity, according to Gladstone Ports Corporation spokeswoman Lee McIvor. “We have just under 1 million tons of coal stockpiled against a capacity of 6 million tons. We are running a very low stockpile,” she said. Gladstone’s capacity to handle 75 million tons per year could be halved this week due to rail system closures and track damage, another Reuters report says. Dalrymple Bay Coal terminal at the Port of Hay Point, the world’s largest coal export port with an annual capacity of 129 million tons, halted operations as stockpiles of metallurgical coal have run too low after a train derailment disrupted supplies. Stockpiles of some 200,000 tons cannot be used because they are in an “unsuitable condition, meaning too wet. And therein lies the next challenge for coal exporters: not only are rail lines damaged or submerged, but so are the mines. Coal mines will need to be pumped out, coal supplies at mine heads will need to dry out and workers (rail and mine), many of whom have been severely disrupted by the floods, will have to be re-housed before they can resume work. Coal production is not going to be turned back on as soon as the floods subside; it could take weeks, even months for full production to be resumed.

Meanwhile China and India are looking to import increasing quantities of metallurgical and thermal coal. Even though China’s total output for the year is expected to rise some 8 percent to over 3 billion tons in 2010, according to data from the China Coal Industry Association, it will still not be enough to satisfy demand and imports will increasingly be required to fill the gap. Net coal imports are expected to reach 145 million tons in 2010, to be higher in 2011. But the coal market was tight before the Australian floods; supply will be severely restricted in coming weeks and prices are already moving higher. According to a Telegraph article, prices are already at a two-year high. The Steel Authority of India has just agreed it will pay $225 per ton to suppliers including BHP Billiton, a level that is 74 percent higher than the price it paid during the year ended March 31. Broker UBS forecasts that prices will hit $250 a ton in the second quarter of 2011. Steel prices (coking coal is a key steel ingredient) were also predicted to rise further this new year than last, and Australia’s floods will add further pressure to China and India’s steel producers’ rising cost base just as fears are taking hold that inflation, particularly in China, is about to take off, as we will be covering in a separate article later this week.

–Stuart Burns

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