HomeNewsFlood-hit BHP output set to drive coal price higher

Flood-hit BHP output set to drive coal price higher


Eastern Australia’s devastating floods will hit production at BHP Billiton’s coal mining operations for at least six more months, the company said after output in Queensland state fell by nearly a third last quarter.

Thursday’s coal outlook was the most detailed the company has released since heavy rains started in November, prompting BHP and other miners to postpone shipments and make force majeure declarations to break sales contracts.

Damage estimates are set to rise as the October-December figures do not include the worst flooding in Queensland in January.

“Until now there wasn’t a peep from BHP about water and flooding and rain or anything in Queensland,” said Andrew Harrington, a mining analyst for Patersons Securities in Sydney.

“It’s obvious now that this flooding has had an enormous effect on its coal business,” Harrington added. “I would expect coking coal prices to go up on this, if only temporarily, until the lost production can be made up down the line.”

BHP also posted a 4% rise in quarterly output of iron ore from western Australia to record levels. Swelling Chinese demand has driven spot prices for ore to nine-month peaks of close to $200 a tonne.

BHP is the world’s largest supplier of sea-borne hard coking coal via a joint venture with Japan’s Mitsubishi Corp. Most of Australia’s coking coal, which is used to make steel, comes from Queensland.

BHP and other miners will likely benefit from this year’s price spikes more than in past years after steelmakers agreed to change to quarterly coking coal pricing from annual contracts.

The flooding has driven contract prices for coking coal as high as $225 per tonne for the first quarter of 2011, compared to $209 per tonne in the fourth quarter of 2010.

Spot prices, however, have shot up to more than $350 per tonne and consultants Wood Mackenzie said prices could reach $500.

This will mean higher second quarter contract prices, based on average daily spot prices over the previous three months.

“When combined with disruption to external infrastructure, we expect an ongoing impact on production, sales and unit costs for the remainder of the 2011 financial year,” BHP said in releasing its fiscal second-quarter production data, showing coal output dropped 30% versus the previous quarter.

That is significantly more damage than the 6% loss in coking coal production close peer Rio Tinto this week said it suffered from the floods.

The shortage of coking coal from Australia, which usually accounts for two-thirds of global coking coal trade, has forced Asia’s steelmakers to look elsewhere for supplies.

“If the problems continue more than what we have built (up) in our inventory, it might become overwhelming. The major issue would be securing prices not volumes, meaning a higher cost to us,” said an executive from South Korea’s No.2 steelmaker, Hyundai Steel.

BHP’s Australia iron ore shipments rose to an annualised rate of 148 million tonnes a year in the quarter, underscoring a growing global appetite for the steelmaking material.

Iron ore is BHP’s most profitable division, expected to account for 39% of operating profit in the current financial year to the end of June, while coal is seen making up 16%, according to Bernstein Research in London.

Deutsche Bank analyst Paul Young said he had already factored in the lost coal production and was maintaining a full-year net profit forecast of $22,198 billion. Spot iron ore prices are at nine-month peaks and nearing the record $200 a tonne level from February 2008.

BHP also warned that delays in the Gulf of Mexico were continuing to impact its petroleum division by causing the deferral of drilling of high-volume production wells.

“With the petroleum division responsible for about 30% of volumes growth over the next three years, BHP now looks to have the highest risk production profile of the Big Four (mining groups),” Liberum Capital in London said in a note.

BHP shares in London shed 2% to 2421,5 pence by 1115 GMT, slightly outperforming a 2,7% decline in the British mining index as metals prices fell.

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