Australian Floods Causing Coal Prices To Rise
2010 was the year of crazy weather. We had a severe drought in Russia, massive flooding in Pakistan, and unexpected frost in Texas… just to name a few. The unusual conditions pushed some commodity prices to record highs.
Well, it looks like Mother Nature isn’t going to loosen her grip in 2011. We’re already seeing a climate catastrophe… and it’s not even two weeks into the year.
Right now, flooding is wreaking havoc in Australia.
Torrential rains are creating record flooding in the Queensland region of Australia. The flooding is so severe, it’s covering an area the size of France and Germany combined! Conditions are harsh… the city of Brisbane, the third largest in Australia, has basically closed down.
Why is that important to us?
The flooding has shut down over 75% of the region’s coal mines. Coal exports have ground to a halt. It’s not just the mines which are flooded. A vast portion of the transportation network in the region is underwater.
And it’s even a bigger deal than it sounds.
Queensland exports over half of the world’s coking coal. That’s nearly $1 billion in coal exports and counting. What’s more, coking coal is a key ingredient in the steel making process. Without it, steel production is likely to drop significantly.
Countries like China are in desperate need of steel right now. It’s vital to their growth. As it stands, Asian customers can expect a long wait before they get their coal delivered. We’re talking about 8 to 15 million metric tons of coking coal being delayed.
Most steelmakers carry no more than three months of coal inventory… and many don’t have contracts in place for additional coal.
And that’s not all…
Asia also depends on Australia for a portion of its thermal coal – coal used to produce electricity. Thermal coal is also taking a major production hit because of the flooding. And prices are starting to climb…
As a matter of fact, global coal prices are through the roof.
Thermal coal is up 52% from August 2010 prices to $140 a ton. Mean-while, coking coal is up 30% from last quarter’s prices… to nearly $300 a ton. And they both could be headed even higher.
More importantly, the increase in coking coal prices could double the cost of steel production. Steelmakers pass on those costs to customers. Major coal importers like China and India may have to cut down on steel consumption… and it could slow their growth.
The flooding may be felt in other ways as well.
The loss of coal exports, transportation lockdown, crop devastation, and shutting down of the region’s cities may cut Australia’s economic activity by half a percent or more. For a developed economy, that’s a huge deal.
What’s more, coal price increases are fueling demand for oil as an alternative energy source. And oil prices are hitting 2-year highs on the increasing demand.
Besides Australia, China stands to lose the most from the flooding. Their economic growth could be slowed due to higher steel and energy prices. Chinese importers are certainly hoping for a quick end to the flooding.
But like anything else in the investments world, there’s a silver lining to this natural disaster.
American coal companies are seeing a spike in demand.
With Queensland’s mines underwater, overseas companies are lining up to buy their coal from American suppliers. With coal prices skyrocketing, many of these companies will be posting record profits over the next few months.
Since coal isn’t a market tradable commodity, you might want to look at US coal companies as an alternative. Several are traded on the major exchanges… one of the biggest is Peabody Energy (BTU).
Harsh weather and nasty storms could once again play a big role in the investments world. These events are game changers and they create the potential to reap big time profits… just like we’re seeing with the Queensland floods and the coal market. Don’t hesitate to cash in on the opportunity.
Category: Commodities
