Assessing Oswald: The Impact of More Flooding Down Under

Australia is still dealing with lingering effects of a particularly severe 2010-2011 storm season. So the late January crossing of ex-Tropical Cyclone Oswald over parts of Queensland and New South Wales brought further insults on top of injuries yet to fully heal.

Damage from severe weather and flooding amounted to at least AUD2.4 billion. Thousands of residents in coastal areas were evacuated ahead of the storm, while nearly a quarter of households in South East Queensland experienced power interruptions as about 2,000 power lines were brought down.

The main coastal fiber-optic cable was cut, causing widespread disruptions and failures of mobile and landline communications, broadband services, ATM machines, electronic payment systems and emergency response numbers. Six fatalities have been reported in Queensland, and one person remains missing.

Emergency officials have said that although recent flooding was severe, it’s not as widespread as the monsoon-like rains that battered Queensland and New South Wales in 2011, when 35 people were killed and an estimated AUD30 billion was shaved off Australian gross domestic product, as coal mining and transportation were knocked out for about three months.

Between 200 millimeters (7.9 inches) and 400 millimeters (15.7 inches) of rain fell over the four days to Jan. 28 on Queensland’s Bowen Basin, home to giant open-pit mines owned by resource producers including AE Portfolio Aggressive Holding BHP Billiton Ltd (ASX: BHP, NYSE: BHP).

Coal production in Central Queensland was impacted primarily because of transport disruptions. The Port of Gladstone–the largest multi-commodity port in Queensland, the fifth-largest such port in Australia and the world’s fourth-largest coal-exporting terminal–suspended ship loading for two days.

BHP said all of its sites are operating, and the company is working to go back to normal operations while assessing the impact of the floods on their production. The company will report results for the first half of fiscal 2013 on Feb. 20.

Alumina and liquefied natural gas (LNG) production suffered minor impacts, with operations returning to normal levels shortly after Oswald passed.

LNG projects planning to export from Gladstone were shut in by Oswald but have returned to operation. Work on the thousands of inland coal-seam gas wells needed to feed the Gladstone plants continued. “Initial indications suggest minimal impact on our activities,” said a spokesman for BG Group Plc (London: BG/, OTC: BRGXF, ADR: BRGYY), which is building the Queensland Curtis LNG plant.

AE Portfolio Aggressive Holding Rio Tinto Ltd (ASX: RIO, NYSE: RIO) and Xstrata Plc (London: XTA, OTC: XSRAF, ADR: XSRAY), the world’s biggest producer of thermal coal, both declared force majeure on coal deliveries from Queensland after flooding shut a key rail link to ports.

Rio Tinto invoked the clause covering events beyond its control on its contracts to sell coal from its Kestrel mine due to damage to the Blackwater rail network, which carries the second-biggest tonnages of coal in Queensland to Gladstone Port. Aurizon Holdings, the operator of the rail network, announced this week that Blackwater is back in service. A second Aurizon line used to haul coal, Moura, is still under repair.

Rio has yet to provide an update on its coal operations. Its Yarwun alumina plant was shut down temporarily, while production at the Rio-operated Queensland Alumina refinery continued at reduced rates. Rio Tinto Alcan’s operations at Weipa, on Cape York Peninsula in Western Australia, were affected when Oswald first formed but are now operating as normal. Management will report 2012 results on Feb. 14.

A spokesman for Aurizon said the Moura line could be shut down for another 10 days to two and a half weeks, with the system opening “progressively” beginning Feb. 18 and concluding Feb. 25.

The impact on miners’ bottom lines is difficult to assess at this point. Production disruptions will hurt volumes, but supplies will also be limited. Because Australia is such a significant producer of coking coal as well as thermal coal, the supply part of the equation is critical. Limitations will push prices higher, at least partially offsetting the impact of reduced volumes.

Australia is the world’s largest metallurgical coal exporter, accounting for roughly two-thirds of global trade. It also supplies thermal coal used in power generation. Spot coking coal prices recently topped USD167 per metric ton, above the most recent quarterly settlement of USD160.

The Australian thermal coal benchmark price rose 2.4 percent to USD95.04 per metric ton last week, its biggest weekly gain in nearly two months. However, miners in the Hunter Valley in New South Wales, Australia’s biggest thermal coal-producing region, weren’t hit as hard by Oswald as miners in Queensland.

At the same time, the potential for more rain and flooding during an Australian cyclone season that will continue through April 30, 2013, could be enough to lift prices for producers’ coal contracts with Japan. Xstrata typically sets the price with a major Japanese utility, often Tokyo Electric Power (TEPCO), negotiating on behalf of Japanese buyers, setting the precedent for the rest of the industry.

The annual contract begins at the start of the Japanese financial year, on April 1, and is the largest of the year in terms of volume. Long-term contract prices are typically a few dollars above the Australian coal benchmark price, a premium usually explained by security of supply.

Xstrata is probably in position to push for a price above USD100 per metric ton for thermal coal shipments to Japan. Concern about further supply disruptions could also carry met coal prices past USD170 per metric ton.

Communication Breakdown

AE Portfolio Conservative Holding Telstra Corp Ltd’s (ASX: TLS, OTC: TTRAF, ADR: TLSYY) major lines in Queensland were cut, completing isolating several towns from communications technology. Services were largely restored within 24 hours.

Customers throughout the affected region, in Queensland as well as New South Wales, continued to report service problems five days after Oswald passed due to power outages caused by flooding.

“With repairs made to cable damage caused earlier in the week as a result of the severe weather and flooding, technicians are now contending with access issues and power outages in many locations, which continue to impact services,” Telstra said in a statement.

The financial impact on Australia’s dominant telecom will likely by negligible, as management on Feb. 7 affirmed full-year earnings guidance. We have a full report on Telstra’s fiscal 2013 first-half results in The Roundup section of this week’s edition of Down Under Digest, which is available exclusively to subscribers of Australian Edge.

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1. 

   Reply Ehud Moscovitz February 13, 2013 at 2:26 PM EDT

   Attn: David Dittman
   Hello!

   I liked your article on SMSUF (PK).
   My broker out a hold on this security, claiming there’s some action taking place.
   Do you know what, (if anything) is going on with it?

   Thanks

   Ehud Moscovitz
2. 

   Reply bob hauslein February 16, 2013 at 6:07 PM EDT

   Interesting information