According to the Queensland Resources Council (QRC), coal companies operating in Queensland, have already taken a hit of approximately US$1 billion from lost production as torrential flood waters following heavy rainfall in the state inundate mines.
Mines with production capacity of 90 million tpa are under force majeure, including mines operated by Anglo America, Aquila Resources, BHP Billiton, Macarthur Coal, Rio Tinto Group, Vale and Xstrata. With around 34% of Australia's 2008/09 coal export capacity of 263.4 million t effectively taken out by the floods, the impact on mining companies will be significant, probably running into billions of dollars when lost production and repair work are accounted for, particularly as insurance companies are unlikely to provide significant assistance.
Substantial losses are likely partly because an immediate resumption of coal mining activity is unlikely. Water needs to be pumped out of mines into local watercourses, efforts that are already under way in some areas where floods have started to recede, according to QRC chief executive Michael Roche. However, many miners are unable to attend work, while others are assisting local communities. As a result, the mines that are operating are largely functioning with a skeleton staff.
Queensland authorities have also stated that the resumption of mine production is a distant priority compared to the welfare of communities, so mining companies may have limited state assistance in the near term.
Australia has nine coal-loading terminals, some of which have been affected by the floods, undermining the country's coal-export capacity. Reports suggest railway lines running between mines and the Port of Gladstone are out of action, while other ports near Mackay have also been disrupted. An accident on one of the lines in Queensland reported by Australia's freight haulier, QR National Ltd, may further complicate efforts to transport coal to loading terminals. In the short-term, drawing on coal stockpiles at the ports will help make up for the shortfall in exports, although reports suggest these have been left sodden by the heavy rain, making loading onto vessels difficult.
Outlook and implications
The extent of the disruption to production is likely to push up prices of both coking coal and thermal coal in the Asian market. According to the Commonwealth Bank of Australia, Premium Peak Downs brand coking coal was last quoted at US$253/t FOB, although with disruption to supplies forecast to last until into early February, competition for cargoes could increase on the spot market, pushing up prices further, particularly due to security-of-supply concerns. The high prices for coking coal will probably be passed on by steel manufacturers, pushing up prices of steel and therefore construction costs for steel-intensive facilities.
Thermal coal prices are likely to come under similar pressure from the floods, potentially leading other coal sellers and traders to boost profits, while buyers might be tempted to make spot purchases from other regional producers, such as Indonesia, over the coming month. In China, the rise in prices of Australian thermal coal will encourage power plants to purchase from domestic coal mines to avoid increasing feedstock costs, which, due to the regulated power-pricing structure, will be difficult to pass to end consumers.