Bloomberg News

Record Coal Price Risk Gaining on Australian Rain: Commodities

October 12, 2011

(For more commodities columns, click CMMKT.)

Oct. 12 (Bloomberg) -- The record rains that flooded Australia and led to surging coking coal prices last year are brewing again.

The chances of above-average rainfall in parts of Northern Queensland in the rest of the year are 65 percent to 70 percent, Australia’s Bureau of Meteorology said Sept. 19. One contributor is the returning La Nina weather event that cooling ocean temperatures and stronger trade winds are indicating may return this quarter.

The prospect of disrupted supply from the world’s biggest exporter led Citigroup Inc. analyst Daniel Hynes to say coal may “spike” more than 20 percent to about $350 a metric ton, if the disruption is as severe as last summer. The previous La Nina, Australia’s most expensive natural disaster, shut mines and sent coal to a record $330 a ton in the June quarter.

“Last year was a near record La Nina event, possibly the second strongest since 1917-1918,” Andrew Watkins, the bureau’s manager of climate prediction, said by phone from Melbourne. “About 50 percent of the time a La Nina follows a La Nina, so it’s not that uncommon to have a double whammy.”

A lack of inventory at steel mills could well cause a “degree of panic” should the forecast La Nina bring more rain to Queensland, disrupting supply, Macquarie Group Ltd. said last month. BHP Billiton Ltd., the world’s biggest producer of coking coal with mines in Queensland’s Bowen Basin, recorded a 30 jump in earnings from the fuel in fiscal 2011 because of higher prices even as the bad weather cut output.

Sharp Rise

“The impact on the coking coal market is enormous if the Bowen Basin is out of action,” Richard Knights, a mining analyst at Liberum Capital Ltd. in London, said by phone. A prolonged period of supply disruption “would mean a sharp rise in the next quarterly contract,” he said.

Conditions in the tropical Pacific Ocean are consistent with a late-forming La Nina, which is likely to be weaker than the strong 2010-2011 event, the bureau said today.

The threat of further disruptions in Queensland comes as global steel consumption is forecast by the World Steel Association to gain 5.9 percent this year and 6 percent next year. As a result of lost production, Australia’s exports are set to drop 14 percent this year to 137 million tons, according to the nation’s commodity forecaster. The “spectre” of another La Nina, though forecast to be weaker than 2010, is starting to build, Macquarie said in a Sept. 23 report.

Some producers in the Bowen Basin, which supplies about 60 percent of the global market, have struggled to remove water from their mines over the winter months and BHP expects production and exports to be crimped until years’ end.

Rain Preparation

“The La Nina weather cycle is anticipated to continue to affect rainfall and general weather patterns in central Queensland into 2012,” Cockatoo Coal Ltd., a producer that counts Mitsui Corp. and South Korean steel mill Posco amongst equity and project partners, said in a presentation this month.

Cockatoo is building a new bridge “which will significantly reduce the likelihood of road closures during the wet season,” the company said in an e-mail. It’s also completing a new levee designed for a 1 in 1,000 year flood event, to replace a 1:100 levee, the company said.

Rising coking coal costs have helped dent earnings at steel mills including Baoshan Iron & Steel Co., China’s biggest publicly traded steelmaker, Sumitomo Metal Industries Ltd., Japan’s third-largest steelmaker, and India’s Tata Steel Ltd.

Rising Costs

Every ton of crude steel needs about 600 kilograms of coking coal, according to BHP, which forecasts demand for the fuel to gain more than 50 percent by 2025, driven by China.

BHP, Anglo American Plc and Rio Tinto Group were among companies to notify customers they would miss shipments after heavy rain and flooding in November through January inundated mines. The BHP Billiton Mitsubishi Alliance, a venture with Mitsubishi Development Pty., is the largest global seaborne supplier of coking coal with a 22 percent global share.

While producers have increased supplies following the floods, Royal Bank of Scotland Plc analysts led by Lyndon Fagan said last month in a report that Australian supply will remain constrained. “The potential for a La Nina to re-occur in late 2011 and 2012 cannot be ruled out.”

Australia’s economy shrank in the first quarter by the most in 20 years after flooded coal mines, railways and farmland hurt exports. The government in June estimated the bill from the floods had reached A$12 billion ($11.8 billion).

Wettest Season

Contract prices have dropped from their second-quarter record amid turmoil in global markets and as China moved to cool economic growth. Sumitomo Metal agreed to pay Anglo and BHP about $285 a ton for the three months starting Oct. 1, compared with $315 a ton the previous quarter, according to a statement.

Rio said Sept. 20 that its Australian coal operations have “largely recovered” from flooding earlier this year. Prices may drop to $275 a ton in the first-quarter, Deutsche Bank AG forecasts.

“If it’s going to be ongoing wet conditions that are reasonable, that can be tolerated at the mines as they have done in the past,” Peter Rudd, mining and resources manager at Armytage Private Ltd., said by phone from Melbourne.

The November-to-April wet season in Queensland was the second wettest on record with more than 905 millimeters of rain recorded, the bureau said. The August-to-April period was the nation’s wettest on record. The Bowen Basin alone received 350 millimeters of rain last December, while 727 millimeters fell at BHP’s Hay Point export terminal, BHP said in a Sept. 30 presentation, citing weather bureau data.

‘Girl-Child’

La Nina means “the girl-child” in Spanish and is the opposite of the weather event El Nino, which can cause drought in Australia. It refers to the cooling of the central and eastern Pacific Ocean and can shift weather patterns around the world. La Nina is associated with the increased chance of wetter conditions in Australia.

La Nina, though not as strong as in September 2010, is expected to strengthen gradually into 2012, the U.S. Climate Prediction Center said Oct. 6.

China’s imports of coking coal are forecast to gain at an average rate of 9 percent a year to reach 73 million metric tons in 2016, according to Australian government forecasts. India may triple coking coal imports within five years to meet surging demand from steelmakers, Australia & New Zealand Banking Group Ltd. forecast in May.

“Underlying demand for coking coal should continue to grow as blast furnace steel production increases and as China ramps up production from new, large blast furnaces which must use high-quality coking coal to produce high-quality steels,” Jefferies & Co. Inc. said in a Sept. 6 report. “We expect the current hard coking coal price of almost $300 per ton to persist for at least the next two years.”

--Editors: Keith Gosman, Rebecca Keenan

To contact the reporters on this story: Elisabeth Behrmann in Sydney at ebehrmann1@bloomberg.net; Jesse Riseborough in London at jriseborough@bloomberg.net

To contact the editors responsible for this story: Rebecca Keenan at rkeenan5@bloomberg.net; Andrew Hobbs at ahobbs4@bloomberg.net


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