Damaged transport facilities and infrastructure in Australia may delay resource supply to domestic firms.
Severe floods in Australia’s Queensland province, one of the major coal exporting regions in the world, are likely to have a mid-term impact on Indian steelmakers, which are heavily dependent on overseas coking coal.
With 40 per cent of the seaborne coking coal market at risk, analysts estimate domestic companies may be left scrambling for one of the most important steel-making inputs as production facilities and transport infrastructure have been badly hit. With streets having been wiped away and infrastructured damaged, it may take months to rebuild and bring things in order.
India produces just seven million tonnes of coking coal and steel producers rely mostly on imports, especially from Australian, for the 62 million tonnes of steel-making capacity in the country. Import from Down Under accounts for 50 per cent of the input cost.
The country’s largest steelmaker, Steel Authority of India Ltd (SAIL), imports 10.5 million tonnes of coking coal for its 13 million tonnes steel-making capacity. “Around 70 per cent of the imported coal is from Australia. Our suppliers, Rio and Anglo American, declared force majeure on supply on December 24,” SAIL chairman C S Verma said.
But the situation Down Under is grim. “About 40 per cent of seaborne coking coal (100mt in a 250 (mtpa market) is at risk due to the floods. The thermal coal market, however, is less affected since most of the thermal coal comes from New South Wales,” said Amrita Sen, analyst, Barclays Capital.
At least 12 producers have declared force majeure, a legal provision that allows firms to miss contractual deliveries due to unusual circumstances, as inventories have been depleted significantly, and operations of rail systems have also been disrupted, Sen added.
Stocks at the port of Gladstone, which serves the region, have significantly depleted and ancillary transport infrastructure, including roads and railways, have also been affected.
La Niña, a disruptive weather pattern that brings heavy rain, eases drought and causes widespread flooding, according to the Australia’s Bureau of Meteorology, ensured that 2010 was the wettest year on record for Queensland.
“As of now, we have stocks. The mines are still not operational, and we don’t know if the companies will extend force majeure. If there are fresh rains and floods, then it would be worrisome,” said Verma.
But for Gujarat NRE, the largest independent producer of coking coal in India, the deluge has come as a silver lining, as its mines in Australia are in the province of New South Wales, which is unaffected by the inundation. The company’s mines there are expected to produce 1.8 million tonnes this financial year.
“Our mines are in New South Wales, and there is been no impact due to the floods in Queensland. The port and transport infrastructure we use is also separate. But shortly, when the steel mills start chasing the commodity, it could trigger panic buying. If the situation persists for a long time, I wouldn’t be surprised if the (spot) prices move over $300 per tonnes,” Gujarat NRE’s Chief Financial Officer P R Kannan said. Spot coking coal prices have already moved from $225 a tonne, the contract price for the quarter, to $240 a tonne. “There is normally a lag. The impact on prices is likely to be reflected in the next quarter,” said Neeraj Singal, Managing Director, Bhushan Steel.
Overall, too, the situation in Australia will translate into additional support for prices of coal, both thermal and coking, which already seen a rise through the last few quarters.
“Floods have been one of the key reasons for prices to rise. Moreover, with temperatures remaining frigid in most parts of Europe and China, coal demand has remained at elevated levels. Prices are likely to remain well supported in the short term, with a worsening of weather related supply shortfalls potentially providing additional upside,” Sen said.
