* Spate of weather disasters to prompt contract rethink
* Weather risks seen becoming key features of contract talks
* Contract terms could reflect forecasting improvements
By James Regan and David Fogarty
SYDNEY/SINGAPORE, Feb 8 A surge in
weather-related disasters in Australia could push global mining
firms to overhaul supply contracts and rethink how bad weather
will affect their operations and customers worldwide.
Climate scientists say a warmer world will cause greater
extremes of weather and some scientists have pointed to climate
change as factors in some of the weather disasters in Australia.
Miners needed to better assess the threats from floods,
storms and droughts and include weather data and risks in mine
management and commodity contracts, said Robert Milbourne, a
mining and resources lawyer for global law firm Norton Rose.
"Contracts must now more accurately address the consequences
of weather variability and non-delivery due to weather,"
Milbourne, a former senior counsel for Brazilian miner Vale
, told Reuters.
"Traditionally, severe weather disruptions would be deemed
beyond the reasonable expectation of either party. If severe
weather events gradually become more foreseeable due to
meteorological forecasting capacity, then that forecasting (and
planning) capacity will need to be reflected in transactions,"
A series of floods, drought and cyclones has badly disrupted
mining in Australia, particularly in Queensland state, where
coking coal miners have been hit by severe floods twice in three
The latest floods along Australia's east coast, which began
late last year, have led to 16 coal mines in Queensland covering
total annual capacity of 94.3 million tonnes declaring full or
partial force majeure.
Force majeure is a legal let-out that enables miners to
break or suspend sales contracts without penalty.
Australia is a leading coking coal producer and Queensland
produces 90 percent of the nation's coking coal from miners
including Anglo American , Rio Tinto and
Eastern Australia's devastating floods would hit production
at BHP's coal mining operations for at least six more months,
the world's biggest miner said after output in Queensland fell
by nearly a third in the last quarter.
Flood damage to mines and transport infrastructure will cost
the Queensland government A$2.9 million a day in lost coal
royalties for the rest of the financial year, which runs until
June 30, a study by the Queensland Resources Council showed.
Droughts and cyclones can also be extremely disruptive, with
iron ore mines in the northwest of Western Australia state
vulnerable to powerful cyclones.
"The sequence and intensity of flooding and cyclones (in
Queensland) has actually been down since the 1980s, so
historically speaking they have had a pretty good run," said
Queensland Resources Council spokesman Jim Devine.
But mining firms would not want to elaborate on risk
"That is something that would be very commercially sensitive
and not something mining companies would contemplate discussing
in earshot of each other," he said.
BHP Billiton declined to comment on the likelihood of
changes to its risk assessment strategy. When asked about risks
from more intense cyclones in Western Australia, iron ore major
Fortescue Metals Group said:
"Risk mitigation is already included in the planning, design
and construction of Fortescue's operations and infrastructure
due to weather events commonly experienced in the Pilbara," in a
reference to a major iron ore region in the state. But it had
not quantified the costs of risk mitigation, it added.
PRICING IN RISK
Milbourne said weather risk needed to be a much more central
component of contract negotiations and such risks could also
begin to be priced into the value of mine assets, such as the
cost of operating mines in disaster-prone areas.
"I think commodity contracts such as coking coal will now
have to expressly look much more seriously at force majeure and
delay as fundamental commercial terms," said Milbourne, who is
based in Queensland's capital Brisbane.
Reinsurers Munich Re say weather related disasters have
tripled in Australia over the past 30 years.
"We're at the mercy of the environment and many stakeholders
haven't fully analyzed that variability before," Milbourne said,
adding he believed there was going to be a premium on getting
accurate meteorological data.
Martijn Wilder, head of Baker & McKenzie's global
environmental markets practice, agreed.
"We haven't seen a dedicated focus on making sure that force
majeure events in contracts reflect what are catastrophic
climate events," he told Reuters from Sydney.
Predictions of what were seen as extreme one-in-100 year
events were becoming more frequent, he said.
"Insurance companies like IAG and Swiss Re have continuously
made this point and yet a lot of neither industry nor government
have taken real steps to mitigate against such events."
But he thought the floods and last week's powerful Cyclone
Yasi that struck northern Queensland might bring change.
"The rawness of the cost of such events and the ever-growing
loss of infrastructure, livelihood and life, means there is a
greater chance than ever that companies will really start to
look at this," he said.
Superannuation funds also needed to take climate
catastrophes into greater account when investing, he added.
"It's also an issue for those who invest in companies. If
you're an investor in a mining company in an area that is
susceptible to cyclones, should you start thinking about how
this affects that company?"
(Editing by Clarence Fernandez)