Q+A-Australia’s coal industry hit by Queensland flooding

By Rebekah Kebede

PERTH, Jan 11 (BestGrowthStock) – Flooding in Australia’s
northeast has hit the country’s $50 billion coal mining sector
hard, paralysing much of the coal industry in Queensland,
which produces over half of the country’s coal.

Below are a few facts about how the coal industry has been
impacted:

WHAT KIND OF COAL IS AFFECTED BY THE FLOODS?

Queensland, Australia’s largest coal producing state,
produces mostly coking or metallurgical coal used for
steelmaking, but it also produces some thermal coal, which is
used for power generation.

Australia is the world’s biggest exporter of coking coal,
which is used in steel manufacturing and accounts for more
than half of global exports, and is also the second-biggest
exporter of thermal coal used for power generation.

WHICH COMPANIES HAVE BEEN AFFECTED?

All of the major miners operating in Australia, including
Anglo American Metallurgical Coal , BHP Billiton
, Peabody , Rio Tinto , and Xstrata
have been affected by the floods and forced to invoke
force majeure, a legal provision that relieves companies of
delivery obligations in the event of acts beyond their control.

Other miners that have declared force majeure or suspended
operations include Aquila Resources , Vale ,
Macarthur Coal , New Hope Coal , Wesfarmers
and Ensham.

HOW MUCH OF GLOBAL COAL SUPPLY HAS BEEN AFFECTED BY THE
FLOODS?

Estimates vary widely with analysts indicating that
between 40 and 80 percent of Australia’s coking coal exports
were offline last week. [ID:nL3E7C60SY]

Queensland’s coal outages represent about 41 percent of
the world’s metallurgical coal exports and 8 percent of the
world’s thermal coal exports, according to ANZ Bank estimates.

Disruptions from the flood means potential for 10 million
lost tonnes, or about $2 billion worth of coking and thermal
coal, according to UBS estimates. The estimate does not
include monetary losses due to damaged infrastructure and
repair/recovery costs.

If floods continue to impact the industry for the first
quarter, the number of lost tonnes could climb as high as 30
million tonnes for metallurgical coal and 5-10 million tonnes
of thermal coal.

WHAT KIND OF MINES HAVE BEEN WORST HIT BY THE FLOODS?

The majority of mines in Queensland are open-cut mines,
which are the type of mine most vulnerable to flooding,
according to experts.

The open cut mines are essentially large pits that are dug
into the ground and are exposed to the elements. Heavy rains
and flooding can compromise the stability of the pit walls and
water pooling in the mine can be challenging to pump out.

Underground mines can also be impacted by rains and
flooding, particularly if the flooding is close to the opening
of the mine, but are generally less impacted than open cut
mines.

Both open cut mines and underground mines already pump out
naturally occurring water in the mines during non-flood
periods.

HOW HAS FLOODING AND RAINS AFFECTED EXPORT INFRASTRUCTURE?

The flooding has forced QR National to repeatedly
shut a number of rail lines running from inland mines to ports.

Currently, two lines — the Blackwater system and the West
Moreton system — are shut due to flooding, while the
Goonyella system into Dalrymple Bay Coal Terminal and the
Moura system into Gladstone port are still operating.

Coal export infrastructure is likely to recover more
quickly than mines, according to analysts.

WHAT IS THE COAL PRICE IMPACT OF THE FLOODS?

Although Queensland produces mostly coking coal, both
coking and thermal coal prices have been affected, in part
because there can be some degree of substitution between
coking and thermal coals.

Most coking coal is sold on a quarterly basis. Australia’s
top metallurgical coal miner, BHP Billiton negotiated
a price of $225 per tonne for first quarter 2011 coal.

Analysts expect a significant price spike in the second
quarter of 2011, with estimates for the new quarterly price
ranging between $250 and $300 per tonne, and some saying they
could even go higher.

Thermal coal prices have also been impacted with the
globalCOAL Newcastle index climbing to over $140 per tonne
over the weekend.

Buyers have been looking for alternative supplies in other
coal producing countries including China, South Africa, and
Indonesia.

IS THE IMPACT FROM CURRENT FLOODING WORSE THAN 2008?

Several industry watchers have said that current flooding
in Queensland may hit the industry harder than the last major
flood, in 2008, when monsoon rains severely disrupted coal
operations and caused huge coking coal price hikes.

The rains in Queensland have lasted for months and came
unseasonably early, making it hard for coal producers to build
stockpiles to last through the monsoon first quarter.

As a result, the total export impact may be as much as
double that of 2008, according to ANZ estimates. In 2008,
export volumes fell 17 percent in the first quarter compared
to the same period the previous year.

HOW LONG WILL IT TAKE FOR AUSTRALIA’S COAL INDUSTRY TO
RETURN TO NORMAL?

In a Reuters snap survey of analysts last week, most said
it would take a month or more for Australia’s coal industry to
return to pre-flood levels. The median expectation among
analysts was that recovery in output to pre-flood levels would
take about 3 months.

Just pumping water out of the mines once rains stop could
take months, according to analysts. Environmental regulations
restrict the amount of water that can be pumped out of mines.

However, Queensland regulators have given special
permission to discharge water to a number of mines given that
the size of the floods may dilute any mining residues,
according to industry sources.

Restricted physical access to some mines due to the
flooding has already delayed damage assessment and could
further delay the industry’s recovery. Further, mine employees
who have been personally affected by the far-reaching floods
may have trouble reaching the mines.

(Reporting by Rebekah Kebede; Editing by Ed Lane)