Australia Considering Building An Ark

Jim Brown
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Queensland Australia has been washed off the map in many places with water levels so high only a random hill is visible. The floods have produced a vast inland sea. Unfortunately many of Australia's coal mines are under that sea.

Australia's coal industry may be disrupted for months after key rail and road links were washed away. Some infrastructure could take years to repair according to authorities.

The floods have swamped mines in Queensland state, paralyzing operations that produce 35 percent of Australia's estimated 259 million metric tons of exportable coal. Australia accounts for two-thirds of global exports of coking-coal, needed to make steel.

"There are some aspects of the rebuilding of infrastructure that could take years," Major-General Mick Slater, chief of the flood recovery operation in Queensland, told a news conference in Rockhampton. "We still don't know what it looks like underwater. We do know that major roads, rail lines and bridges are all damaged."

A snap survey by Reuters showed the analysts expectations for the recovery in coal output would take about three months. Commodities form a large part of Australia's $1 trillion economy and coal is the top export earner. The revenue forecast before the floods was for nearly $50 billion in coal revenue in fiscal 2011.

Barclays Capital warned in its daily commodities briefing, "Until weather conditions improve, the situation could deteriorate further. Australia's exports will likely take at least a couple of months to normalize.

The floods have affected an area the size of France and Germany combined. Three people have been killed and at least 40 towns are isolated or partially under water after the country's worst floods in 50 years. Damage has been estimated at $5 billion.

A muddy inland sea has stranded some of Australia's best beef cattle on tiny islands of high ground, destroyed wheat and sugar crops, and the wet season has only just begun. Floodwaters were receding on Friday in some areas only to flood new ones farther downstream.

The biggest coal port, Dalrymple, is running at near-normal export levels of around 200,000 metric tons a day despite the floods, but authorities are concerned they are simply drawing down inventories to meet shipments that may soon run out. "We really have no idea at the moment what's happening with mine production. If we can't get it in, we can't ship it out," said Dalyrmple spokesman Greg Smith. Gladstone port, also with a daily export capacity rate of 200,000 metric tons, is closed.

Queensland's mines minister and analysts say it will be months until mines in Australia's biggest coking coal area, the Bowen Basin, are fully operational. "It's highly likely to be worse than the major floods of 2008, which severely hampered mine operations for two to three months and reduced Queensland coal exports by 9.5 percent or 3.5 million metric tons in the first quarter of 2008," according to Mark Pervan, a commodities analyst with Australia & New Zealand Bank (ANZ).

Asian steel-makers who buy the bulk of Australia's coal have been forced to look elsewhere. Park Cheon-tark of Hyundai Steel said the company had bought coal from Russia, Canada, the United States and China, while asking long-term contract sellers to ship earlier than previously agreed. "With these inventories, we have no problem running steel plants through mid-April."

Anglo American, one of the nation's top four miners of steel-making coal, and smaller Australian rival Cockatoo Coal Ltd have both said it could take some weeks to pump water out of their mines.

Anglo's major rivals, Rio Tinto, Xstrata and BHP Billiton, have also been hit by the floods, and all have made force majeure declarations, which temporarily release miners from delivery obligations. Estimates vary widely on how much capacity has been affected by declarations of force majeure.

UBS puts the figure under force majeure at between 45 million and 50 million metric tons or about 20 percent of Australia's coal exports in 2009. The majority of that is coking coal.

Barclays Capital estimates 120 million metric tons of annual coal production capacity are under force majeure.

Analysts expect coking coal prices to rise as much as a third to $300 a metric ton in the aftermath of the floods, pushing thermal coal prices higher in the process. ANZ on Friday lifted its thermal coal spot price forecast by 16 percent to $140 a metric ton for the first quarter and premium hard coking coal contract prices by 19.5 percent to $275 metric tons in the second quarter.

QR National, the main coal carrier in the Bowen Basin, said on Friday a major rail link would be under water "well into next week" and assessment of rail damage was being hindered by floodwaters. Parts of the Blackwater rail line linking Xstrata's Rolleston mine to the port of Gladstone, had been washed away by the force of the floodwaters.

Privately some analysts are speculating it could take 3-4 months to resume full production, possibly longer. Equipment in the flooded mines will have to be dried out and repaired and that will have to wait weeks until the mines have been pumped out. That assumes there is no structural damage like cave ins.

Authorities are positive many rail bridges have been washed away. Rebuilding railroad bridges will be a top priority but these things take time and materials. Australia's rainy season is just getting started and the waterlogged country could suffer another month of rains sparked by the high humidity once the flood waters begin to recede.

Coal producers like (BTU), (BHP) and (RIO) will take a hit to their earnings from the outage BUT those big miners have production available from other locations and coal prices are already up +19% and will probably go higher. If BTU loses 15% of its production but receives 19% higher prices on the other 85% will those numbers wash?

I would be cautious in opening new long positions in coal companies with exposure to Queensland until the companies issue statements with Q4 earnings on how badly this will hurt them.

Jim Brown

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