As the new year arrives, Australia is suffering from some of its worse flooding in decades. Cities & Towns are sinking under water levels as rivers rise above their flood banks. This is not the random downpour during the hot summer months, which happens on the northern coast. This is one of those events where the domestic military saves lives at home by helping to rescue people. Flood waters are expected to hit levels last seen in 1918.
La Niña is in full force now, and with that comes a change in the weather patterns around the world. Locations that are historically dry can receive large downpours of rain, overwhelming the capacity of the storm drain systems to handle the torrential volume of water.
The current reports are stating that over 200,000 people have been affected so far. Whole towns have been cut off from the transportation network as roads are overwhelmed, airports close and railroads stop traffic.
The flood water will have a direct impact on the exporting of coal to Asia in the near term. The flooding will overwhelm the pumps at many of the open-pit mines, effectively ending coal mining until the pits are drained and the equipment that has been damaged by water is replaced or repaired.
Rio Tinto & Anglo-American have been to declare Force Majeure on some coal contracts, with expectations that this will continue for a while. This will start to impact Chinese coal reserve levels in the winter months. Currently 30% of Australia’s coal production is off-line.
29 December 2010
Weather impacts Rio Tinto Coal Australia’s Queensland operations
As a result of severe monsoonal rain in central and northern Queensland, force majeure has been declared on coal sales contracts from mines in which Rio Tinto Coal Australia has a majority interest. The mines are Hail Creek, Kestrel, Blair Athol and Clermont in Queensland’s Bowen Basin.
The severe monsoonal rain, on top of the significant rainfalls in November and December, has had an adverse impact on mining operations, and has cut access roads and rail networks.
As rain is continuing to fall in the region and further rains are forecast, Rio Tinto Coal Australia is currently unable to provide an estimate of the full impact of this adverse weather or the duration of the force majeure declaration.
While all efforts are being made to minimise the impact of this adverse weather on coal production, our primary focus at this time is on the safety and well-being of our employees and their families.
I hope that those affected by the flooding can find a warm dry place soon. Lets keep them in our thoughts during the these holiday hours.
Happy New Years to everyone,
Jack H Barnes
Rarely do Americans lift their gaze above their navel to look beyond continental USA and I thank you for doing so.
The floods are confined to central Queensland state and are about as large as Texas in extent.
Rhe coal miners are clearly entitled to declare force majeure – their mines are flooded or their train lines are underwater. They, along with the miners of New South Wales state, provide 2/3 of the world’s exported hard coal – the quality coal used for steel making. Prices of hard coal are very high and steelmakers are resisting further price rises. While existing contracts are suspended, the miners will be free to sell from existing stockpiles and uncommitted unflooded mines to whomever they choose, at whatever price the market will bear.
That will be a very high price. Coal will be rationed – only steel makers prepared to transfer eye-popping sums to the miners will get any coal at all. Some steelmakers must miss out, with serious national consequences as so many other industries depend on their product – construction, car making, manufacturing.
We are hearing of disruptions to Chinese electricity supply due to widespread (steaming) coal shortages. these are largely fueled by low-quality domestic coal, where possible ‘sweetened’ with quality Australian coal.
So China is about to experience a near-simultaneous restriction to both steel making and electricity production.
They are about to see a ‘black swan’ moment, not to their advantage. And, no, in free-enterprise Australia the government cannot and will not order the coal miners to prefer one consumer over another.
Watch this story: it has global implications.
ps. I originally posted this comment on BI which had mirrored your excellent piece.
David, Thank you for the reply. When I wrote this piece, I wanted to focus on the economic impact this would have to Both Australia and China, however the reality of the flooding was such, that I decided to let those details rest for a follow up article.
I completely agree with you that this is China’s inflationary Black Swan. The *New* cost to import fuel to manufacture cheap products is going to be the straw that breaks the proverbial camels back.
China is about to have its imported food costs sky rocket, its import energy costs sky rocket, and this will all hit, at the same time it has to deal with a currency valuation issue. China has built an economy that seeks employment over profits, this works until there is no demand, or no ability to meet that demand, due to cost push issues.
If they fight the cost of raw commodities with a revaluation of the Yuan, it will destroy the employment base that exist for jobs that are not profitable. I believe Hu made this clear when he visited NYC this last Fall and said that you (Americans) are asking us to commit suicide by raising our exchange rate… We would loose all of those jobs we have gained in the last decade.
I believe China is about to loose those jobs anyway now…
http://www.businessspectator.com.au/bs.nsf/Article/BHP-Billiton-Queensland-floods-Bowen-Basin-pd20101231-CN2NR?OpenDocument&src=kgb
Further insight here