Q+A: Australia's coal industry hit by Queensland flooding

PERTH Tue Jan 11, 2011 5:39am EST

PERTH (Reuters) - Flooding in Australia's northeast has hit the country's $50 billion coal mining sector hard, paralysing much of the coal industry in Queensland, which produces over half of the country's coal.

Below are a few facts about how the coal industry has been impacted:

WHAT KIND OF COAL IS AFFECTED BY THE FLOODS?

Queensland, Australia's largest coal producing state, produces mostly coking or metallurgical coal used for steelmaking, but it also produces some thermal coal, which is used for power generation.

Australia is the world's biggest exporter of coking coal, which is used in steel manufacturing and accounts for more than half of global exports, and is also the second-biggest exporter of thermal coal used for power generation.

WHICH COMPANIES HAVE BEEN AFFECTED?

All of the major miners operating in Australia, including Anglo American Metallurgical Coal, BHP Billiton, Peabody, Rio Tinto, and Xstrata have been affected by the floods and forced to invoke force majeure, a legal provision that relieves companies of delivery obligations in the event of acts beyond their control.

Other miners that have declared force majeure or suspended operations include Aquila Resources, Vale, Macarthur Coal, New Hope Coal, Wesfarmers and Ensham.

HOW MUCH OF GLOBAL COAL SUPPLY HAS BEEN AFFECTED BY THE FLOODS?

Estimates vary widely with analysts indicating that between 40 and 80 percent of Australia's coking coal exports were offline last week.

Queensland's coal outages represent about 41 percent of the world's metallurgical coal exports and 8 percent of the world's thermal coal exports, according to ANZ Bank estimates.

Disruptions from the flood means potential for 10 million lost tons, or about $2 billion worth of coking and thermal coal, according to UBS estimates. The estimate does not include monetary losses due to damaged infrastructure and repair/recovery costs.

If floods continue to impact the industry for the first quarter, the number of lost tons could climb as high as 30 million tons for metallurgical coal and 5-10 million tons of thermal coal.

WHAT KIND OF MINES HAVE BEEN WORST HIT BY THE FLOODS?

The majority of mines in Queensland are open-cut mines, which are the type of mine most vulnerable to flooding, according to experts.

The open cut mines are essentially large pits that are dug into the ground and are exposed to the elements. Heavy rains and flooding can compromise the stability of the pit walls and water pooling in the mine can be challenging to pump out.

Underground mines can also be impacted by rains and flooding, particularly if the flooding is close to the opening of the mine, but are generally less impacted than open cut mines.

Both open cut mines and underground mines already pump out naturally occurring water in the mines during non-flood periods.

HOW HAS FLOODING AND RAINS AFFECTED EXPORT INFRASTRUCTURE?

The flooding has forced QR National to repeatedly shut a number of rail lines running from inland mines to ports.

Currently, two lines -- the Blackwater system and the West Moreton system -- are shut due to flooding, while the Goonyella system into Dalrymple Bay Coal Terminal and the Moura system into Gladstone port are still operating.

Coal export infrastructure is likely to recover more quickly than mines, according to analysts.

WHAT IS THE COAL PRICE IMPACT OF THE FLOODS?

Although Queensland produces mostly coking coal, both coking and thermal coal prices have been affected, in part because there can be some degree of substitution between coking and thermal coals.

Most coking coal is sold on a quarterly basis. Australia's top metallurgical coal miner, BHP Billiton negotiated a price of $225 per ton for first quarter 2011 coal.

Analysts expect a significant price spike in the second quarter of 2011, with estimates for the new quarterly price ranging between $250 and $300 per ton, and some saying they could even go higher.

Thermal coal prices have also been impacted with the globalCOAL Newcastle index climbing to over $140 per ton over the weekend.

Buyers have been looking for alternative supplies in other coal producing countries including China, South Africa, and Indonesia.

IS THE IMPACT FROM CURRENT FLOODING WORSE THAN 2008?

Several industry watchers have said that current flooding in Queensland may hit the industry harder than the last major flood, in 2008, when monsoon rains severely disrupted coal operations and caused huge coking coal price hikes.

The rains in Queensland have lasted for months and came unseasonably early, making it hard for coal producers to build stockpiles to last through the monsoon first quarter.

As a result, the total export impact may be as much as double that of 2008, according to ANZ estimates. In 2008, export volumes fell 17 percent in the first quarter compared to the same period the previous year.

HOW LONG WILL IT TAKE FOR AUSTRALIA'S COAL INDUSTRY TO RETURN TO NORMAL?

In a Reuters snap survey of analysts last week, most said it would take a month or more for Australia's coal industry to return to pre-flood levels. The median expectation among analysts was that recovery in output to pre-flood levels would take about 3 months.

Just pumping water out of the mines once rains stop could take months, according to analysts. Environmental regulations restrict the amount of water that can be pumped out of mines.

However, Queensland regulators have given special permission to discharge water to a number of mines given that the size of the floods may dilute any mining residues, according to industry sources.

Restricted physical access to some mines due to the flooding has already delayed damage assessment and could further delay the industry's recovery. Further, mine employees who have been personally affected by the far-reaching floods may have trouble reaching the mines.

(Reporting by Rebekah Kebede; Editing by Ed Lane)

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