Coal Sliding as Australian Flood Boost Lost in Drought

The drought across most of Australia’s Queensland state means coal producers are exporting record volumes into an oversupplied market, depriving them of the usual price gains caused by weather disruptions.

Shipments from Queensland, the biggest exporter of coal used in steelmaking, will rise 14 percent to 205 million metric tons in the 12 months ending June 30, the government says. The heavy rains that crimped output and boosted prices in three of the past four years by flooding pits such as Cockatoo Coal Ltd.’s Baralaba mine haven’t come this year.

“Waters that we collected during that flood we’re now utilizing” to reduce dust and in the construction of a wall to protect against a 1-in-a-1,000 years flood, said Andrew Lawson, Cockatoo’s managing director. “Water is a risk and an opportunity,” said Lawson, who joined the company a year after flooding in 2010 halted output.

Deluges in Queensland in 2010 and 2011 swamped mines and washed away rail lines, driving the cost of coking coal to a record and the price of thermal coal burned in power plants to a 30-month high.

Sparse rains this year have led to drought in 79 percent of the state, the biggest area ever. There were 65.86 million tons of coal shipped in the four months to March from terminals at Gladstone, Abbot Point and Hay Point in Queensland, port data compiled by Bloomberg show. That’s up from 58.59 million a year earlier and 45.62 million in 2010-11.

Record Low

Asian steelmakers are getting record-low prices in supply contracts for hard coking coal while power producers are paying the least in about four years for their fuel.

The glut in coking coal is estimated by Morgan Stanley to be about the equivalent of 3 percent of annual seaborne trade. A cut of at least 15 million tons is needed to restore tightness, Sanford C. Bernstein & Co. said in a report last month. Supply of thermal coal will exceed demand by 42 million tons this year, or 4 percent of global trade, UBS AG said in a January report.

“It’s a very oversupplied market,” said Daniel Morgan, an analyst at UBS in Sydney. “I’m not a big bull on thermal. We desperately need some sort of cuts but it hasn’t happened.”

While declining prices are a boost for companies such as Japan’s Nippon Steel & Sumitomo Metal Corp., they will crimp profits at producers including Anglo American Plc. (AAL)

Strikes by train drivers from Aurizon Holdings Ltd. (AZJ) and Pacific National, a unit of Melbourne-based Asciano Group, may curb exports and boost prices. The companies, currently negotiating labor agreements, are the biggest haulers of coal by rail in Australia.

Goldman Sachs

Goldman Sachs Group Inc. expects an average coking coal price of $135 a ton this year while Australia & New Zealand Banking Group Ltd. predicts $140. Spot prices fell 4.8 percent to $129.65 in January and were at $118.75 on March 13, according to data from Energy Publishing Inc.

Thermal coal may average $88 a ton in 2014, the median of five analyst estimates compiled by Bloomberg last month shows. The fuel averaged $85.27 last year and was at $75.60 in the week that ended March 21, according to globalCOAL, a London-based data provider.

Few producers are profiting at current prices, said Richard Goyder, the chief executive officer of Perth-based Wesfarmers Ltd., which operates the Curragh mine in Queensland. The first half of this year will be tougher for coal prices than the previous six months, he said.

Asian Benchmark

Contracts for hard coking coal were agreed to at $143 a ton for the first quarter, a record low for such deals, according to UBS. Thermal coal prices at the Australian port of Newcastle, an Asian benchmark, fell 2.9 percent to $72.98 in the week ended March 14, the lowest since October 2009, according to globalCOAL.

Producers in Australia are also locked into long-term rail freight and port deals, which are required to finance the export infrastructure. Under such take-or-pay agreements, suppliers must pay a fee regardless of whether cargoes are shipped.

Glencore Xstrata Plc last year halted work on an export terminal in Queensland while BHP Billiton Ltd., the largest exporter of coking coal, said last month it would cut 230 jobs at the Saraji mine in the state to reduce costs.

“Coal will not receive another major investment beyond the projects in execution until we see a marked improvement in those returns,” Andrew Mackenzie, the CEO of Melbourne-based BHP, said last month on an earnings call with analysts.

‘Traumatic Event’

In early 2011, a landslide washed away part of a rail bridge used to transport coal before tropical cyclone Yasi, packing winds stronger than Hurricane Katrina, hit the state and dumped rain into an area already saturated by flooding.

Australia experienced the wettest second half of the year on record in 2010, according to the Bureau of Meteorology. BHP, Rio Tinto Ltd. and Peabody Energy Corp. were among producers that declared force majeure, a clause that allows them to miss contracted deliveries because of events outside their control.

In December 2010, the Dawson River in Queensland state swelled and broke through a wall built to protect against a 1-in-a-100 years flood at the Baralaba mine.

The floods were “a very traumatic event for the company,” said Lawson of Cockatoo Coal, adding that it took almost two years to recover and remove the trucks and excavator buried in the pit. “Those sorts of floods have an impact on your mining for at least a couple of years afterwards.”

To contact the reporter on this story: Ben Sharples in Melbourne at bsharples@bloomberg.net

To contact the editors responsible for this story: Pratish Narayanan at pnarayanan9@bloomberg.net Ramsey Al-Rikabi

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