China's the Real Cyclone for Coal
Here's what happened to coking coal prices the last time extreme weather hit the Bowen Basin, the corner of northeastern Australia that produces about half of the tonnage in the global seaborne market:
Why the discrepancy? In theory, major rainfall should be a big problem for coking coal, the variety mostly used in steelmaking. In 2011, the wet season halted port activity, tore up railways and, most devastatingly, filled open mine pits with floodwaters.
Australia's coking coal exports were 40 percent lower in January of that year and 26 percent down in February compared with 12 months earlier. The effects were long-lasting, with export volumes for the full year falling 17 percent.
It's still too early to tell what the effects of Cyclone Debbie will be. The eye of the storm is forecast to have crossed the Australian coast around midday local time on Tuesday. It should hit close to the Abbot Point port mainly used by Glencore Plc, with the most destructive winds missing the more important Dalrymple Bay and Hay Point terminals near Mackay. It then looks set to track south pretty much along the length of the Bowen Basin -- but the final path, and the amount of rain that gets dumped, is highly uncertain.
Still, markets typically buy the rumor and sell the fact. So why the somnolence in coking coal prices?
One reason could be the amount of work miners have carried out over the past six years to prevent a repeat of 2011. One of the reasons those floods were so severe was that projects built in the dry El Nino years of the mid-2000s were often designed to divert as much rainfall as possible to mine sites, to provide water to wash impurities and other unwanted matter from coal.
Companies have since done the reverse: building up levees and floodwater storage, adding pumping equipment, and improving monitoring to ensure that excessive rainfall doesn't end up in pits where it will block access to coal seams and take months to discharge safely. As a result, the current interruptions -- a suspension of operations at BHP Billiton Ltd.'s South Walker Creek mine and from Glencore's Collinsville and Newland sites, and a halting of Aurizon Holdings Ltd.'s coal trains -- are likely to be short term.
There's another factor. Last year's dramatic price spike, which drove coking coal to its highest level since 2011, was caused largely by floods in China's Shanxi province, combined with the effects of a temporary directive from Beijing that coal mines should operate for only 276 days of the year.
At present, the best bull case for coking coal prices is the argument that the 276-day rule will be reinstated -- but any supply disruption from Australia would make that less likely. Just as a bad employment number will often boost stocks on anticipation that central banks will cut interest rates, it looks like the chance of supply disruption in Australia is being weighed against the odds that such an event would cause China to ease controls.
Six years ago, the key driver of the global coking coal market was the weather in northern Australia. Nowadays, it's China's National Development and Reform Commission. Beijing's economic planners often move in mysterious ways -- but their decisions are still more predictable to traders than acts of God.
Figures equivalent to about 155 miles per hour and 7.5 inches. We've used different indexes because the Steel Index only started compiling daily prices in 2013. The prices in the first chart are the quarterly contract prices that are the traditional benchmark for coking coal.
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