FLOODS ravaging Queensland are expected to drive global coking coal prices more than 20 per cent higher for the second quarter.
This, as mines and associated rail and port infrastructure are brought to a standstill amid record rainfalls.
The state produces more than half of global seaborne coking coal, which is used in steel-making and ranks as the second-largest export for Australia.
As major port hubs and rail lines are shut down, leading commodities forecasters are predicting a sharp jump in second-quarter contract prices.
"Given the already tight met coal market, reference prices are set to rise further in the near term and maintain elevated levels through early 2011," Macquarie's London-based commodities team led by Jim Lennon told clients.
"There is strong potential for spot price rises for premium hard coking coal towards $US300 a tonne FOB Australia from $US246/t currently, while it seems inevitable that the next quarterly contract will rise from the $US225/t FOB Australia level in the coming quarter."
FOB stands for free on board and is the price buyers pay for coal when they also carry the cost of shipping and further transport to market destinations such as Japan, Korea, China and Europe.
If second-quarter contract prices for hard coking coal were set at $US300 a tonne, it would represent a one-third price appreciation.
Goldman Sachs commodities analyst Paul Gray said he expected the tightness in hard coking coal to spill over into semi-soft and PCI coal categories.
According to industry specialists McCloskey Coal, PCI producers are now seeking $US180 a tonne FOB for delivery in the first quarter, a rise of more than 20 per cent, and the major semi-soft suppliers are seeking $US170 a tonne FOB (more than 19 per cent).
BHP Billiton, Wesfarmers and Anglo American joined other producers yesterday in declaring force majeure on their Queensland coalmines.
Anglo American said its Callide, Dawson, Foxleigh, German Creek and Moranbah North operations had been hit by rains in the Bowen Basin that the weather bureau estimates are three to five times above seasonal averages.
Force majeure is a legal term relating to the inability to deliver on a contract due to causes that are outside the control of the parties, such as natural disasters.
Japanese buyers are set to be hurt most, with ships capable of taking 2.5 million tonnes sitting off Hay Point and Dalrymple Bay waiting to load, followed by India and South Korea. Macquarie noted that there were no China-destined ships off any of the major ports.
The production disruption is also likely to hit the earnings of Queensland coal producers to varying extents. CLSA analyst Hayden Bairstow noted that Macarthur Coal had downgraded earnings in December and said he "believes a further downgrade is now possible".
However, the profit hit for BHP and Rio Tinto was unlikely to be significant given their scale and diversified operations.
North American coking coal producers would probably snare the tonnages that would otherwise have been shipped from the lower-cost Queensland ports, despite the higher freight costs.
Macquarie's Mr Lennon also noted that the floods may have ramifications for international price-setting mechanisms. "It raises the spectre of an interesting sub-plot, in that steel-makers would likely be more amenable to monthly pricing for coking coal (as proposed by BHP Billiton) in a price spike environment rather than, say, locking in $US300/t for a whole quarter," Macquarie told clients.
"We think a shift to monthly pricing would be difficult in the coming months -- even more so when considering that disruptions are going to leave very little spot material available from which to base an index."
Watch the Richard's Bay Coal Spot Price over the coming weeks and months. A 20% gain is going to boost the bottom line nicely:-)
