Edinburgh, 17 January 2011

Wood Mackenzie’s analysis of the implications of the Queensland floods for the coal industry finds that over half of Australian exports are likely to be affected and the impact of the decrease in exports in this ongoing situation will be felt strongly in global coal markets.

The scale of current flooding in Queensland is worse than the heavy rainfall of 2008. However, because the situation is still ongoing with more rain possible, the magnitude of the full supply impact is uncertain. Key points from the analysis about the impact on Australia’s coal supply and what this means for the global coal markets, are outlined below.

Impact on Australia’s coal supply and exports

• Most of the Queensland coal industry is affected. 46 mines are either flooded or are serviced by a rail line that has experienced disruption. Australian exports are being strongly impacted as mines are affected directly through flooding and indirectly through the closure of rail lines.

• The mines affected account for 55% of Australia’s total exports - 80% of the affected exports are metallurgical and 27% thermal. The affected metallurgical exports accounts for 91% of the country’s hard coking coal exports. Most of the consumers for this output are steel makers in the Asia Pacific region.

• The overall production loss is still uncertain. But if all the 46 mines ceased production for one month, the export impact will be 14 million tones (Mt). This is made up of 7 Mt hard coking coal, 2 Mt semi- soft and semi-hard coking coal, 2 Mt pulverised coal injection (PCI) coal and 3 Mt thermal coal. In reality, different mines will be impacted for different durations and it will take time to understand the full effect of the rainfall but some of the production lost over this period could possibly be recouped later in the year.

Impact of export disruption on global seaborne market

• As the rainfalls have intensified on January 11, it is reasonable to assume that hard coking coal prices could reach between US$400 and US$500 per tonne.

1. Key drivers that will determine the severity of the market impact of the supply disruption include: GDP and steel production; Electricity generation; availability and price of competing energy sources; stockpile levels of crude steel, coke and coal; price of steel and implied profit to accommodate raw material price increases; ability of Australian mines to offer substitute tonnes of semi-soft coal; and the availability of production from other supply regions.

2. Market factors support the case for a coal price movement exceeding that of prices due to the 2008 Queensland floods.

• Asian economies are growing at a rate stronger than in 2008 and demand for thermal and metallurgical coal is increasing.

1. Raw steel production increased in October, after the industry worked down stockpiles mid-year.

2. The supply of coking coal has been tight through 2010, supporting prices well above the cost of marginal production.  Therefore, most supply regions have been producing at capacity and replacement tonnage will be difficult to secure.

3. In the global thermal coal market, impacts from the Australian floods are exacerbated by supply disruptions in Colombia, Venezuela, and South Africa.

4. In the Atlantic basin spot prices have reached US$130/tonne delivered into Europe. In the Pacific basin thermal spot prices have already risen sharply to US$140 per tonne at the port of Newcastle and could approach—or exceed the US$197 per tonne experienced in 2008.

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