Australian floods may hurt global steel production

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The huge floods sweeping across northeast Australia could have a significantly negative impact on the global steel industry.

Queensland, the epicenter of the flooding, provides half of the world’s supply of coking coal, a crucial ingredient in the manufacturing of steel. Mines in the area are paralyzed by the heavy rains and may remain idle for many months.

Over the past three weeks, the global spot price of coking coal produced in Queensland has spiked to $253 per tonne from $225 in the past three weeks. (During the last major flood in the area in 2008, price of coking coal peaked at $305 per tonne.)

We have three-quarters of all of our coal fields unable to operate and unable to supply markets, said Queensland’s Premier Anna Bligh. There is likely to be a significant long-term effect of that, not only national but internationally.”

Railroad lines which carry the coal to ports for export have also been flooded out.

The flooding she added, present a remarkable problem out there in the mining industry.

Bligh also warned that mining companies will face a long, slow climb back to full production.

Even before the deluge hit, coal production in Queensland was already hampered by unseasonal rains in September, which led companies to use up their back-up inventory.

China, which produced about 44 percent of the global steel in November, is heavily reliant on coking coal from Australia.

According to Bloomberg, Daniel Brebner, a London-based analyst with Deutsche Bank AG, said “both coking coal and thermal coal are impacted, however coking coal may be more critical as Australia is the key global seaborne supplier. It is possible that, with constraints also for high-rank thermal, steel producers in China and elsewhere might have to lower steel production as a consequence, thereby putting pressure on iron-ore pricing.”

Indeed, Asian steel producers will likely scramble elsewhere to purchase coking coal.

For example, China Steel which is based in Taiwan, typically purchases 80 percent of its coking coal from Australia, but will now have to look at the spot market for purchases, where prices will surely keep rising.

Macquarie Group believes flooding could push the price of coking coal to $300 per tone.

Research by Steel Market intelligence suggests that a 20 percent rise in the price or coking coal, would raise the cost of steel production by more than $30 per tonne.

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