As storm clouds break, London Calling gets biblicalPublished by MAC on 2011-01-10
Source: Nostromo Research, Business Spectator
A plague of floods, crocs, and ultimate darkness?
Sometimes "natural events" do more to dent a company's share price than criticisms by campaigners at a shareholders annual general meeting.
That was certainly the case with Rio Tinto, as huge floods have devastated Queensland over the past three weeks, wreaking massive damage on peoples' homes, crops and thoroughfares.
|Coal trains are grounded at Gladstone in floods
- Daniel Munoz, Reuters
The downpour also disrupted output of coking coal from the world's most important single source of this dark material, compelling producers to declare force majeure on their existing contracts.
The term force majeure is colloquially translated as an "act of god" (even in secular states) and legally entitles a supplier to default if it can't fulfill its commitments because of unforeseen extra-human events.
However, the December 2010 catastrophe was arguably neither natural nor unpredicted.
Following similar, if less momentous, flooding in early 2009, Australian climate scientists and the Green Party warned that a severe drought, being suffered in the southern part of the country, seemed to be mirrored by extra-ordinary flooding in the north. ["Bushfires and global warming: is there a link?: Scientists have a hunch rising temperatures due to human activity are making fire and flood more likely", Guardian 8 February 2009]).
Not surprisingly, as a result of the 2010 disaster, the share price of Rio Tinto fell (albeit by only around 2.5%). Even though waters now seem to be receding, it's feared that crocodiles and disease will stalk the land. Full recovery is going to take a long, long time.
However, in the medium-term the economic future for Rio and fellow Australian coking coal miners looks bright.
Thanks to the major squeeze on coking coal supply, its market price has risen - as has that of lower-quality, lower-cost thermal coal used to generate electricity, and which the major companies also mine and deliver.
Going better with coke
Steel mills not only require iron ore; they also depend on higher-grade coking (aka metallurgical) coal in order to smelt the raw materials.
Australia meets around two- thirds (sic) of global demand for sea-borne coking coal - making up for the lack of it in other countries, even if they are rich in the thermal variety. [see: Dark Materials: the consequences of clinging to coal]
That's a staggering percentage in itself. But equally, if not more significant, is that the majority of this coal lies in just one sprawling deposit, Queensland's Bowen Basin.
Although a significant number of companies dig up this black stuff (including Aquila Resources, Macarthur Coal, Vale and Wesfarmers) there's no question which of them hold the power in this critical market sector.
They are four of the world's biggest eight mining companies: Australia-UK's BHP Billiton and UK-Australian Rio Tinto lead the way, followed by London-listed Anglo American and UK-Swiss based conglomerate Xstrata.
Xstrata is also the world's biggest corporate exporter of thermal coal. (As a country, Indonesia is by far the most important single source of these exports).
But, thanks largely to Bowen Basin, BHP Billiton is the globe's most important exporter of coking coal, which it extracts in a joint venture with Mitsubishi of Japan.
While mining's numero uno has a smaller "developing" joint venture with Mitsui in the same area, and coking coal mines in New South Wales, much of BHP Billiton's hopes are pinned on its 75%-owned IndoMet Coal exploration project at Maruwai in Central-East Kalimantan, Indonesia.
No doubt the torrents, recently raining down on Bowen, have spurred BHP Billiton to begin exploit Maruwai's high quality coking coals earlier than previously anticipated.
This is bound to trigger considerable opposition to the project from Kalimantan's forest-dependent communities (not forgetting the orangutans currently under some kind of protection around the Maruwai concessions). See: BHP Billiton: new chair, same old story
A drain on resources
Of course, those very communities will be primed with promises of all those social uplift and employment programs that BHP Billiton (in common with Rio Tinto, Anglo American and Xstrata) are currently implementing in Australia - not least in Bowen Basin itself.
The area was characterised by a 1999 study as "a large region with massive development and many significant cultural heritage places and values". (For which read: Aboriginal peoples' spiritual and economically vital sites and routes. [Bowen Basin Aboriginal Cultural Heritage Project: A Strategic Regional Approach for Research and Management by L. Godwin, M. J. Morwood, S. L'Oste-Brown and A. Dale. Australian Archaeology No. 48 (June 1999), pp. 29-34 ].
Ten years later, in October 2009, four other researchers identified recent developments in the Bowen Basin, describing how they impacted on both Aboriginal and non-Aboriginal residents in six locations.
They came up with a mixed bag of positive and negative conclusions [Mining development and social impact on communities in the Bowen Basin, case studies by Petkova V, Lockie S, Rolfie J, Ivanova, G, in Rural Society, vol 19, number 3, October 2009).
The signal fact is that Bowen Basin's miners have had many years in which, not just to implement, but go beyond, Australia's weak Native Title legislation.
But the jury is still out on whether their presence has materially benefited many of those living (and now metaphorically drowning) there.
Shares in the future
As we opened London papers on the first day of the new decade, our eyes fell on an article by Patrick Collinson in the Guardian [1 January 2010] invoking us to "open [our] own coal mine",as one of "Eleven ways to make money in 2011".
Vacuous as this piece of pulp may be, it wasn't a total fiction.
Wrote Collison: "Evy Hambro, one of the world's biggest investors in the mining industry (he helps manage $40bn (£26bn) in natural resources at Blackrock, including its top-performing Blackrock Gold & General fund) reckons that coal will be king once again in the commodity markets in 2011".
Hambro pointed out that, last year alone, China added about 51 gigawatts of coal-fired capacity.
"India is also becoming a large net importer of the black stuff, helping to send global coal prices soaring...Prices for a tonne of [thermal] coal exported from Australia are now $115, compared to $88 a year ago, while in Europe the price has jumped from $83 to $126..."
Although tempted to round off this commentary in yet more apocalyptic terms, we'll observe US writer William Safire's invocation to “last, but not least, avoid cliches like the plague.”
Having said that - if our common future depends on an expanded reliance on coal, it's going to be a dark one indeed.
[London Calling is a prophecy chronicled by Nostromo Research. Views expressed in this column do not necessarily represent those of any other party (whether on earth or elsewhere). Reproduction is welcomed, provided full acknowledgment is given to the source].
** Article update on 24 January 2011 with "Aussie Coal Mining Washed Out by Floods"
BHP's deluge of luck
By Stephen Bartholomeusz
31 December 2010
The Queensland floods are causing trauma and devastation in that state. They'd also be the cause of some furrowed brows in Japan, China and India.
Most of the big steel mills have just wrapped up negotiations for their first quarter coking coal supplies, agreeing to an eight per cent rise in the price to $US225 a tonne for the first quarter of 2011 - about a 75 per cent increase in the prices paid in the year to March.
With BHP Billiton, Rio Tinto, Anglo American, Xstrata, Wesfarmers and others having declared force majeure on the contracts they have with mills to supply them from their Queensland mines, the mills are facing severe and potentially prolonged disruption to their supplies that may force them to have to source their coal from more expensive producers elsewhere. Heavy rains in Queensland earlier this year had already disrupted production.
Queensland, notably the Bowen Basin producers, accounts for about two-thirds of the global seaborne trade in coking coal and the affected Queensland mines something approaching half that trade.
The lost production inevitably means the price will rise further in the second quarter of 2011, with most analysts expecting it to push up towards $US250 a tonne, with some prospect of the price of premium coking coal subsequently rising towards the $US300 a tonne level it reached after heavy rains flooded BHP's Queensland mines in 2008.
The mills have already experienced steep - 40 per cent-plus - increases in the cost of their iron ore requirements this year, as well as finally succumbing to BHP's long-running campaign to shift iron ore pricing from annual benchmark pricing negotiations to more market-related pricing.
BHP, which is the dominant coking coal producer, has been quietly waging a similar battle in the coking coal market, with some success. It has shifted the pricing to a quarterly basis. That hasn't, however, satisfied Marius Kloppers, who is keen to see the market moved gradually to near contemporaneous market-based pricing.
As in iron ore, the mills have been resisting the BHP push but the floods, coming after the earlier rains disrupted supply, rains have tilted the negotiating table towards BHP.
In such a production-constrained environment, customers who don't agree to BHP's demands risk either paying an even bigger premium or, in the worst-case outcome, loss of access to supply.
The wild card in the relationship between the producers and the mills is China's economy and the impact that Beijing's determination to bring inflation under control - evidenced by the Christmas Day interest rate rise - might have on its growth rate and its consumption of iron ore and coking coal. It imported about 40 million tonnes of coal this year.
If China's economic growth rate were to slow from the high single-digit levels it has traditionally pursued and maintained to mid-single-digit numbers, or it were successful in shifting the balance of that growth from investment to consumption, it could re-write the outlook for iron ore and coal demand and prices.
In the near term, however, once they are able to resume full production, it is the Bowen Basin producers who will have the upper hand in future negotiations.
Opening China's inflation floodgates
By Karen Maley
5 January 2011
Queensland's devastating floods have raised fears of a global coal shortage, and increased the difficulty faced by Chinese authorities as they try to battle mounting inflationary pressures without causing the economy to slow too severely.
The Queensland Resources Council, the industry body, estimates that flooding across central Queensland has already cost the state's coal industry $1 billion in lost production. It could take several months before coal companies are able to pump the water out of flooded mines and resume full production.
Floods have also resulted in cuts to key transport links. The rail link to the Port of Gladstone, a key port for coal exports, has been disrupted. There are 18 vessels waiting to load coal from the port, with a further 12 expected in the next 10 days.
Some analysts are tipping that the floods will see the price of coking coal rise by more than 30 per cent in coming months, as steelmakers battle to ensure they have secure supplies.
Australia supplies two-thirds of the seaborne trade in coking coal, which is an essential ingredient in steel production. The floods are estimated to have hit mines that account for up to 40 per cent of the world's coking coal, and there are already reports of Asian steel producers trying to buy coking coal in the US and Canada.
The cost of coking coal has soared to around $US253 a tonne, an increase of more than 10 per cent from quarterly contract prices before the flooding. But some analysts believe the floods will likely push prices to between $300-$330 a tonne. They estimate that the impact of the latest floods will be worse than the Queensland floods in early 2008, which saw coking coal contracts climb above $300 a tonne.
The price of thermal coal, which is used in power stations that produce electricity, has also risen. Thermal coal prices have now climbed to $US133.5 a tonne, up 9 per cent over the past two weeks.
Some of the world's biggest coal producers, including BHP Billiton, Anglo American, Rio Tinto and Xstrata have declared force majeure, which means that they unable to fulfil their contractual obligations to supply coal because of events beyond their control.
Soaring coal prices and a reduction in coal supplies will exacerbate inflationary pressures in China, and could result in even worse disruptions to the electricity supply.
According to recent report in the Chinese publication, Caixin online, some Chinese power plants are already facing a shortage of coal supplies, due to the Chinese government's policies aimed at stabilising coal prices.
Last month, China's National Development and Reform Commission (NDRC) published a notice that instructed coal producers not to raise the key power coal contract price (the contract price used by large state-owned producers and power plants) in 2011.
The NDRC was concerned that an increase in the coal price would force power plants to raise the price of electricity, which would fan inflationary pressures.
But the NDRC's notice has led to a thermal coal shortage in several provinces in Central and Northern China, which has caused a disruption to electricity supplies. Some coal producers have simply been unwilling to sign new contracts. Others have found ways of getting around the price control system. For instance, even if power plants have signed coal contracts, they may need to pay producers an extra fee before coal is shipped.
The NDRC's notice to coal producers not to raise their prices came two weeks ahead of the move by the Chinese central bank to raise interest rates by 25 basis points. The central bank's move, which followed a similar move in October, was aimed at curbing growing inflationary pressures. But it fuelled fears that the Chinese central bank is becoming vigilant about fighting inflation is about to start a series of interest rate hikes that could cause a severe slow-down in the Chinese economy.
Fears that a Chinese steelmakers may be forced to cut back production as a result of the Queensland floods has increased the risk that the Chinese economy could slow too sharply.
Heavy metals released into flood waters
Friends of the Earth Press Release
29 December 2010
Queensland: Queensland's environmental regulator the Department of Resource Management (DERM) is powerless to stop flood waters creating massive pollution from mine sites across the state. Mines will be releasing huge amounts of heavy metals into the flood waters and much of this will pile up behind weirs in catchments like the Fitzroy and be a pollution problem for many years. Pollutants include dangerous levels of copper, uranium, zinc, aluminium, lead, arsenic, cobalt and nickel.
Even more worrying, flooding of coal seam gas areas is undoubtedly over-topping holding ponds containing large amounts of salty water. Once this salt hits the high clay content black soil plains of the Darling Downs it is likely to destroy the ability of these fields to produce again since salt on soil containing more than 30 per cent clay renders such soil unproductive.
Friends of the Earth spokesperson Drew Hutton said this was the third year in a row that major flooding had caused serious pollution events. In 2008 the Ensham coal mine in central Queensland was flooded and heavy metals were released into the Fitzroy catchment. In 2009 the Lady Annie copper mine in north Queensland released large amounts of heavy metals when its tailings dam was breached.
These events were possibly the biggest pollution events in the state's history.
"The mining industry's claim that dilution solves all these problems is fanciful," Mr Hutton said.
"The dilution effect will offer some diminution of the damage but the heavy metals released from mines will lodge behind any obstructions in the river system and stay in the sediments, ready to be mobilised and the salt from coal seam gas operations will ruin good farmland.
"It is illegal for mining companies to cause such high levels of pollution but all the State government can do is approve these releases and hope for the best.
Aussie Coal Mining Washed Out by Floods
By Scott Eden
21 January 2011
CANBERRA - The floods that have ravaged Australia could reduce that country's coal exports by 15 million metric tons in the first quarter, or 20%, according to a report released by the Australian government Friday.
Since late December, monsoon rains have caused the worst flooding Down Under in more than a century. The deluge has struck the northeastern part of the island nation the hardest, in the state of Queensland. More than 20 have died. Total damages from the flood have been estimated at as much as $20 billion.
The flood study that was released Friday, put out by the Australian Bureau of Agriculture and Resource Economics, said the diminished coal exports could cost the mining industry as much as $2.5 billion. But the decline in global supply caused by the floods will likely push prices higher, "partially offsetting the adverse impact on coal industry revenues," the report said.
The dropoff in exports has been caused not just by mines that had to be closed, the report said. Damaged railroads and seaports, disruptions in obtaining mining supplies, and a diminished workforce cutoff from the mines by rising waters all have contributed to the overall decline.
Queensland's mining districts, especially a region called Bowen Basin, account for more than half of the coal mined in Australia, which is itself the world's biggest exporter of the fossil fuel. Most of the companies operating mines in Bowen Basin, including BHP Billiton, Rio Tinto, Vale, Anglo-American and Peabody Energy, were compelled to declare force majeure, a legal clause in a supply contract that says a company can't be held responsible -- or pay penalties -- on late shipments to customers because of problems caused by events outside its control.
The pain isn't over for Australia. Another cyclone, this one called "Vince," is spinning off the coast of Western Australia, home to some of the world's biggest iron ore mines, and could make landfall by the weekend. If it does, the storm will likely disrupt the iron-ore supply chain, especially the ports.
"If the disruption is very severe, there is a chance that iron ore importers would eventually need to source more iron ore from Brazil, India and other exporters," wrote Jeffrey Landsberg, a dry-bulk shipping analyst and founder of the firm Commodore Research.
Most of Australia's iron ore and coal go to China, which, as it happens, just recorded an all-time record amount of coal imports in December, taking in 17.3 million tons and topping the previous high of 16.4 million, set exactly a year earlier, in December 2009.
-- Written by Scott Eden in New York