After last January’s massive floods that washed across Australia’s resource-rich eastern state of Queensland, severely affecting the region’s lucrative coal mining industry, there are now warnings that more averse weather could be on its way towards the end of this year.
La Niña —a weather phenomenon characterised by unusually cool sea surface temperatures, leading to heavy rains in the Pacific region such as the Queensland floods — has re-emerged but is expected to weaker than last year, metrological agencies have said, adding that the La Niña could strengthen in intensity moving into 2012.
More inclement weather will put further pressure on Queensland’s coal industry, which is yet to recover completely after mines as well as transport infrastructure were damaged by flood waters. Some of world’s largest mining companies, including Rio Tinto, BHP Billiton, AngloAmerican, Peabody, Xstrata and Macarthur Coal have operations in the region, and any impact on production will drive up prices, analysts have indicated.
“A La Nina weather condition usually brings heavy rains to the Australasian region and could disrupt coal production thereby creating supply shortages. We take note that several Australian mines still have water in the pits from last year’s La Nina, due to regulatory discharge constraints,” UBS analyst Andreas Bokkenheuser said in a recent note.
Although the combination of a milder La Niña and better preparedness on part of the industry to deal with a repeat of last year may ensure that the supply-side is better protected, bad weather remains the biggest near-term upside risk for prices at the moment.
“This year’s La Nina is forecasted to be weaker than last year’s record-breaking one that resulted in severe flooding and supply disruptions in Queensland, which pushed prices above $130 per tonne. Since Queensland production and shipments have not recovered to 2010 levels, another wet season could affect production significantly,” Barclays Capital said last week.
INDIA IMPACT
At the same time, heavy rains could also affect Indonesia, the source for more than half of India’s overall thermal coal imports, as “Indonesian mines usually slow down mining and trucking operations significantly during periods of excess rain,” said Bokkenheuser.
Despite the drop in domestic coal production, Indian power producers have been reluctant to purchase expensive seaborne coal, effectively bringing down coal stocks at generation units to critical levels. Therefore, any rise in Indonesian coal prices will only worsen the situation.
However, the biggest domestic impact could be on Indian steel makers, who import more than half of their total coking coal requirement from Australia. India’s largest steel company, Steel Authority of India, for instance, is understood to source about 70 per cent of its import requirement from Down Under.
After the floods in January, coking coal prices had gone through the roof, breaching the $300 per tonne mark, thereby squeezing margins for steel makers. With the recent downward revision in India’s steel demand forecast, on the back of higher interest rates causing distress to the automobile and construction sectors, any rise in input costs will hurt domestic steel makers, particularly now.
