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UPDATE 1-Wild weather could push miners to reassess contracts, risks
February 8, 2011 / 6:38 AM / in 7 years

UPDATE 1-Wild weather could push miners to reassess contracts, risks

(Edits)

* Spate of weather disasters to prompt contract rethink -lawyers

* 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 (Reuters) - 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,” he said.

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 years.

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

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 BHP .

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 management.

“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)

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