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The massive disruptions to Australia’s coal mining in the past month—mainly due to the worst flooding seen in the region in 50 years—have been devastating for the industry, causing the price of coking fuel used in steelmaking to skyrocket.
By Damon van der Linde – Exclusive to Coal Investing News
The massive disruptions to Australia’s coal mining in the past month—mainly due to the worst flooding seen in the region in 50 years—have been devastating for the industry, causing the price of coking fuel used in steelmaking to skyrocket.
This has driven up the stock value of coal mining companies based elsewhere in the world, which some analysts are seeing as an ideal opportunity for short-term gain.
Queensland, a state that occupies the north-eastern section of Australia’s mainland, is the world’s biggest exporter of seaborne coal, supplying many steel-making facilities in Europe and Asia. In fact, Australia alone supplies about half of the world’s metallurgical coal used in steel making.
Rain in Queensland began in late December as a result of heavy precipitation caused by Tropical Cyclone Tasha combined with a region of low atmospheric pressure during the peak of a La Nina event. More than 20 towns in Queensland have been cut off or flooded, with more than 200,000 people affected. Three-quarters of the coal fields cannot operate because of the floods, and rail lines connecting to ports have also been submerged under water.
To further disrupt the supply process, on December 24, the QR National freight railway had a train derailment, causing a temporary closure of the vital Goonyella coal haulage system.
Though the majority of rain has passed, Queensland’s state Premier, Anna Bligh, was quoted as saying that “given the scale and size of this disaster, and the prospect that we will see waters sitting potentially for a couple of weeks, we will continue to have major issues to deal with throughout January.” This means it could take several weeks before the coal mining supply chain is fully operational and able to resume exports and months for the $50 billion a year industry to recover.
The flooding has severely impacted the global production of coking fuel, already causing prices to skyrocket. Cash prices for coking coal on international markets have already risen 10 percent in the last month. According to an article by Bloomberg “prices may increase to between $270 and $300 a metric ton,” say analysts from Macquarie Group Ltd., Morgan Stanley and Daiwa Capital Markets.
The prices of U.S.-based coal stocks have risen as Asian and European importers look for alternative supplies. Australia has traditionally been the largest exporter of this grade of coal, exporting about 125 million tons, with the United States a distant second at 33 million tons in 2009. Alpha Natural Resources (NYSE:ANR), the third-largest U.S. coal producer has recently been one of the top performers among U.S. coal companies as has Massey Energy Company (NYSE:MEE) and Peabody Energy (NYSE:BTU), the largest U.S. coal producer.
The crisis in Australia has also caused a spike in stocks of the largest Canadian coal exporters, including Teck Resources (TSE:TCK.B), Western Coal (TSE:WTN) and Grande Cache Coal (TSE:GCE). Canada is the world’s fourth-largest coal exporter, with $2 billion in shipments a year. It exports about 28 million tons annually to more than 20 countries.
This shortage in Australian coal exports has poised thermal coal as a favorable short-term investment, even as the floods begin to recede and the mining supply chain struggles to regain lost ground. As UBS Investment Research wrote Monday, “exporting trends among US producers indicate a demand for high Btu thermal coal to be sold as high-vol met coal.”