Spring Deluge at Australian Coal Mines Will Force Gains in Global Prices

Record rain and floods in north eastern Australia are disrupting coal output from Xstrata Plc and Rio Tinto Group mines. With more storms coming, prices are forecast to jump from the world’s biggest exporter of the fuel.

“It never stops raining,” said Peter Maguire, mayor of Queensland state’s Central Highlands Regional Council, home to Xstrata’s Rolleston mine, Rio’s Kestrel operation and BHP Billiton Ltd.’s Blackwater venture. “It’s forecast to rain until April-May.”

Australia had its wettest September-to-November spring on record, and the Bureau of Meteorology says southeastern Queensland and eastern New South Wales have a 60 percent to 70 percent chance of getting above-average falls during January to March. This means coking coal used by steelmakers may surge 20 percent to $250 a metric ton in the second quarter of 2011, according to UBS AG forecasts.

The last time Queensland’s Bowen Basin, which has 33 coal mines, was hit with similar weather in 2008, coal tripled to a record $300 a ton, driving up the price of steel used in cars, aircraft and construction.

Queensland had its wettest spring since records began in 1900, receiving 248.2 millimeters （9.77 inches） of rainfall, almost triple the state’s average long-term mean of 84.3 millimeters, according to the bureau.

“We’re now seeing with the spot price over $240 a ton that the impact of the rain would be reflected more aggressively in the second-quarter price than it would in the first,” Peter Richardson, chief metals economist at Morgan Stanley said from Melbourne. “That’s precisely what we’re going to see.”

Global Trade

Xstrata and Vale SA are among producers who were forced to suspend coal sales this month because of the deluge. The forecast summer rain threatens further gridlock in an industry estimated to earn A$33 billion （$32.6 billion） in exports in fiscal 2011. Australia accounts for almost two-thirds of the global coking coal trade.

BHP agreed with Japanese steelmakers to cut coking-coal prices by 7 percent in the current quarter. Kobe Steel Ltd. will pay $209 a metric ton, Hiroyuki Hashimoto, a spokesman for Kobe Steel, said Sept. 1. Prices for the first quarter of 2011 were agreed at $225 a ton, Citigroup Inc. said Dec. 17.

Macarthur Coal Ltd., the world’s biggest producer of pulverized coal, also declared force majeure this month, a contractual clause that allows companies to miss deliveries because of circumstances beyond their control. About 10 million to 15 million tons of output, as much as 10 percent of Australia’s coking coal exports, may be at risk, similar to 2008, according to UBS.

Steel Demand

The disruptions come as global steel demand is forecast to reach a record 1.34 billion metric tons in 2011, the World Steel Association said in October. The biggest producers are in China, which account for about 45 percent of the world’s production.

The deluge in Australia comes as a La Nina event cools the Pacific Ocean and increases rainfall. The nation’s eastern region may have a higher-than-average number of tropical cyclones over the warmer months, with six to seven forecast by the bureau, compared with an average of four.

“It is not a catastrophe yet but we are technically only just starting our wet season,” Keith de Lacy, chairman of Brisbane-based Macarthur, told Susan Li on Bloomberg Television’s “On the Move Asia” on Dec. 8. “Now if the wet season is anything like the dry season it is going to be very difficult. If we can’t supply the coal, it will obviously put upward pressure on prices.”

Tempering Gains

Coal deliveries to Gladstone Ports Corp., about 375 miles north of Brisbane, are 40 percent less than normal, spokeswoman Lee McIvor said in an interview on Dec. 15. Stockpiles at Dalrymple Bay Coal Terminal, the world’s biggest for coking coal, are at 450,000 tons, less than half the average 1 million tons, Greg Smith, general manager of operations, said in an interview on Dec. 15.

Tempering price gains is BHP’s push to set coal prices quarterly rather than annually. The BHP Billiton-Mitsubishi Alliance, known as BMA, is the world’s biggest exporter of coal for steelmaking and operates seven mines in the Bowen Basin.

“You probably won’t see the sorts of huge price movements that we saw a couple of years ago,” Gavin Wendt, a senior resource analyst at MineLife Pty in Sydney, said Dec. 10. “The market can respond far quicker than with the 12-month pricing.”

Forecast rain for New South Wales increases the chance of disruption to exports of thermal coal from the Hunter Valley, according to Royal Bank of Scotland Group Plc. The state received up to four times its mean amount of rainfall last month, according to the bureau. In 2008, prices for thermal coal, used in power stations, more than doubled to $125 a ton.

Power Coal

Thermal coal spot prices for exports from Australia’s Newcastle port have risen 31 percent since the start of the year to $115.60 a ton as of Dec. 17, according to the McCloskey pricing service. Cold weather in the Northern Hemisphere as well as increased imports by China and India is creating “short-term price pressure,” Deutsche Bank AG said this month in a report.

“Flying around in a helicopter in the Hunter Valley three weeks ago, it was pretty visible that there wasn’t a whole lot of coal on the ground,” Paul McTaggart, an equity analyst at Credit Suisse Group AG in Sydney, said by phone.

“March is normally the wet season in Queensland, so there’s a possibility that we’re going to be short coal, particularly given an early and unseasonal heavy northern winter.”