Coal Prices to Soar with Queensland Floods; Rio Declares Force Majeure

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By Vittorio Hernandez | February 1, 2013 8:44 AM EST

Like sugar, global prices of coal are expected to go up in the coming months as an aftermath of the flooding of the Australian state of Queensland on the last week of January.

Australia is a major producer of coking coal and the bulk comes from the inundated state. Heavy rainfall halted production at some Queensland coal and even gold mines and flooded as well rail tracks and roads, also affecting coal deliveries.

BHP Billiton (ASX: BHP), the biggest miner, 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.

Rio Tinto (ASX: RIO), the second-largest miner, declared force majeure on its contracts to sell coal sourced from its Kestrel mine due to damage to the rail system caused by ex-tropical cyclone Oswald.

Aurizon Holdings, the operator of the Blackwater rail network which carries the second-biggest tonnages of coal in Queensland to the port of Gladstone, said it closed the rail system for up to 10 days, beginning Jan 29.

Besides Rio, Xstrata (ASX: XTA) also declared on Jan 29 a force majeure due to the damage on its rail line caused by the floodwater. Xstrata is the world's largest exporter of thermal coal.

Miners use the force majeure clause in their contracts when they fail to meet shipment schedules because of circumstances beyond their control.

Rio's aluminium operations at Gladstone is also affected, resulting in controlled, temporary stoppage at its Alcan Yarwun alumina refinery which is running at reduced production rates.

Queensland's Bowen Basin was inundated by 200 to 400 millimetres of rain. The basin is home to large open pit mines owned by BHP, Mitsubishi, Anglo American, Peabody Energy and other Australian miners.

Emergency officials said although this year's floods were severe, it is not as widespread as the monsoon-like rains that battered Queensland and NSW in 2011.

Here is the latest update on Queensland's floods.

Other than the Queensland calamity, other factors that will determine the price of coal in the international market in 2013 is China's economic growth as South African coal competes with those sourced from Australia and the U.S.

China and India now represents the biggest South African market for its thermal coal, overtaking Europe. The competitiveness of South Africa's coal industry was discussed at the IHS Closkey Coal Conference held on Wednesday and Thursday at Cape Town.

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