MANILA (Reuters) - A powerful cyclone in Australia has put supply of coking coal at risk, forcing big buyers like China and Japan to scour the world for alternative supplies and fueling a rally in prices as the world’s top exporter braces for lost business.
Russia, Mongolia, Mozambique and the United States would benefit from Australia’s disrupted supply as steel producers from China and Japan to India and Turkey move quickly to replace Australian cargoes.
“Cyclone Debbie has not only impacted China, but also Indian steel mills which were running low on stocks, and also Japan and Turkey,” said a shipping source who tracks global coal cargoes but who declined to be named because the deals are private.
“So it looks like a perfect storm for coking coal prices, unless rail lines in Australia get back to work sooner than expected.”
Landslides caused by Debbie have halted operations on the busiest rail line connecting coking coal mines in Australia’s Queensland state to ports, and rail operator Aurizon said it would take about five weeks to repair.
BHP Billiton, the world’s biggest shipper of coking coal, said it won’t meet its export commitments from its mines in Queensland’s Bowen Basin - among five miners in the region to declare force majeure, a clause typically invoked after natural disasters.
India’s Jindal Steel and Power, which runs a coking coal mine in Australia’s New South Wales, also declared force majeure, with mining operations halted by nonstop rains.
The prospect of a five-week delay until the rail lines are repaired, followed by the time needed to restore coal flows from mines to port and then a roughly 12-14 day journey to ports in China and Japan means coking coal consumers may struggle to avoid running out of supplies before normal service from Australia is resumed.
Steel plants use coking, or metallurgical, coal to fire blast furnaces. A shortfall in the commodity means they will have to either close down production, impacting steel output, or risk damaging the furnaces.
About 13 million tonnes of coking coal from Australia will be affected due to the disruption, or about 3 percent of global coking coal supply this year, said Daniel Hynes, commodity strategist at ANZ.
Queensland accounts for 60 percent of Australia’s coal exports, which reached a record 221 million tonnes last year. Some 75 percent of Queensland’s coal is coking coal and the rest is thermal, used in power plants.
Australian premium coking coal futures in Singapore have surged 43 percent to $225 a tonne in two days while Chinese futures jumped 9 percent to a four-month high on Wednesday.
China is the world’s biggest producer of steel and buys nearly half of its coking coal imports from Australia, and will have to move swiftly to avoid disruptions.
“We plan to buy more coking coal from Russia and Mongolia,” said an official in charge of raw materials at a Chinese mill that imports about 5 million tonnes of coking coal annually, mainly from Australia.
“Coking coal from Russia and Mongolia is very important for us. We seldom use U.S. (coking coal) but maybe in the future we’ll use more from the U.S.”
Coal traders have said Chinese buyers are also looking to fix cargoes from the United States.
Stockpiles of imported coal at seven main Chinese ports stood at 15.5 million tonnes as of March 31, according to SteelHome consultancy. The inventory includes both coking coal and thermal coal.
China imported 59 million tonnes of coking coal last year, just over a third of its annual consumption, which ANZ estimates at 170 million tonnes.
There should be sufficient capacity from coking coal suppliers like Russia, Canada and the United States to meet short-term demand, said Wang Di from CRU consultancy.
China “has to seek alternative supplies in unison with drawing down on that inventory (of coking coal),” said ANZ’s Hynes.
“It will definitely result in some desperate buyers over the course of April.”
Apart from seeking supplies overseas, some Chinese steel mills may boost use of local coal, which should benefit Shanxi Coking Coal Group Co Ltd [SHANXA.UL], the biggest supplier.
“We buy some Australian cargoes sometimes. But we mostly buy locally, and the quality is good for our requirement,” said an official at a southern Chinese mill that produces 10 million tonnes of steel a year.
In Japan, where coking coal imports have dropped in the past two months, No.2 steelmaker JFE Holdings said it expects to secure supply for the next four to five weeks from its inventories and some adjustment in shipments. Outside Australia, JFE buys coking coal from Russia and Canada.
Japan is the world’s No. 2 steel producer and Australia supplies half of its coking coal needs.
Steel mills in India, also a major importer of coking coal, could also face problems.
“Whoever has stocks to manage over a short period of time they will be okay, but those who are living on a day to day (basis) will have serious problems,” Seshagiri Rao, joint managing director at India’s biggest steel producer, JSW Steel, told Reuters.
(To view a graphic on 'U.S. coal exporters step in to fill supply gap to China after Australia floods' click here
(To view a graphic on 'Cyclone disrupts coal markets click here)
Reporting by Manolo Serapio Jr.; Additional reporting by Chen Aizhu in Beijing, Yuka Obayashi in Tokyo and Krishna Das in New Delhi; Editing by Raju Gopalakrishnan