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Coal Contract May Rise 78% on Floods, Merrill Says

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Jan. 25 (Bloomberg) -- Steelmakers in Asia may be forced to pay as much as 78 percent more for hard coking coal after floods in Australia disrupted output in the biggest exporter of the fuel, according to Bank of America Merrill Lynch.

Australian free-on-board prices may increase to $400 a metric ton for three-month contracts starting April 1, from $225 a ton this quarter, Merrill Lynch analysts led by Sydney-based Alex Tonks said in a report today. This compares with the bank’s Jan. 11 forecast of $330 a ton for the second quarter.

“There is no doubt the recent floods will rank as one of the most costly natural disasters in our history,” Treasurer Wayne Swan said in his weekly economic note on Jan. 23. “One of the biggest casualties is likely to be our coal exports, with many mines shut down in big coal mining regions like the Bowen Basin, and supply chains severely hampered.”

Flooding has inundated about three-quarters of Queensland, shutting mines, damaging crops and prompting BHP Billiton Ltd. and Rio Tinto Group to declare force majeure, a legal clause that allows producers to miss deliveries. It may take between two to three months for normal operations to resume, Stephen Robertson, the state’s mines minister, said last week.

Australian hard prime coking coal used by steelmakers sold for $320 a ton on average last week, up from $280 the week before, according to IHS McCloskey, a Petersfield, U.K.-based provider of data. That’s the highest level for the data going back to the week ended Nov. 5.

Production Cut

Queensland cut its steelmaking-coal production forecast by 10.5 percent to 177.3 million metric tons for the 12 months ended June 30, Robertson said Jan. 19. That compares with 182.1 million in the year ended June 30, 2010.

Rio Tinto’s force majeure, called on Dec. 29, remains in place at four mines, Alison Smith, a spokeswoman, said today. Anglo American Plc said the declaration on deliveries, made on Dec. 30, is still current and workers are focusing on removing water from pits, according to spokeswoman Jacqui Strambi.

Shipments from Australia’s Hay Point, the biggest export harbor for the steelmaking commodity, fell 22 percent in December from a month earlier after rain and flooding curbed mine output and disrupted rail networks. The BHP Billiton-Mitsubishi Alliance, known as BMA, operates one of two terminals at the port and seven mines in the Bowen Basin.

“All coal mines are operational, but we are still constrained in some way by varying weather impacts, including the disruption to external infrastructure,” Amanda Buckley, Melbourne-based spokeswoman for BHP, said by phone today. BMA is the biggest exporter of coking coal.

Thermal Falls

Australian thermal coal prices dropped for the first time in eight weeks, according to IHS McCloskey. The price at the port of Newcastle in New South Wales, the benchmark for Asia, fell $6, or 4.3 percent, to $132.50 a ton in the week ended Jan. 21, the data provider said.

Thermal coal from Richards Bay, South Africa, the continent’s biggest export facility for the fuel, slipped 6.1 percent to $120.83 a ton, McCloskey said. Shipments from the port climbed 3.8 percent in 2010 to 63.43 million tons, the first annual increase in five years.

Flooding may reduce Queensland’s combined output of steelmaking and power station coal by between 18 million and 23 million tons, Merrill Lynch forecast today. It previously put production losses at between 10 million and 20 million tons.

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

To contact the editor responsible for this story: Clyde Russell at crussell7@bloomberg.net