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Australian exports and mining industry disrupted by Cyclone Debbie

Shipment costs fall 20% while Australian coal price rallies 50%

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Flood damage from near the town of Bowen in the Australian state of Queensland on March 30 after Cyclone Debbie passed through the area (Pool photo)   © Reuters

TOKYO/HONG KONG -- Floods and landslides caused when Cyclone Debbie swept across northeastern Australia last week have disrupted global coal supplies and shipments, pushing up the price of coal while pushing down the costs of surface transportation.

The cyclone has devastated the northeastern state of Queensland, the world's production hub for coking coal, a vital ingredient in steel, with floods and landslides forcing mining producers to halt operations. Rail lines connecting the region's coking coal mines to ports were damaged by landslides, pushing up the spot price of the benchmark Australian coking coal by more than $30 per ton, about a 50% increase from the end of March. As a result, coking coal prices rose above $200 per ton, while some traders said that price went as high as $240 per ton.

"With the lingering effects of Cyclone Debbie meaning that many coal mines in Queensland are still closed and those that are open can't use the railways to get their product to port, the volume of coal exports will fall in April," said Paul Dales, chief economist for Australia and New Zealand at Capital Economics, in a note on Tuesday. As most major producers are stuck in a similar situation, Australia's coking coal exports could decline by 1.2 million tons to 1.5 million tons this year.

Major mining conglomerates including BHP Billiton and Glencore said this week that the setbacks meant they would not meet their export commitments, as rail networks would take weeks to repair. Hong Kong-listed Glencore's shares inched up 1% this week to close at 30.60 Hong Kong dollars, while BHP Billiton, which trades in Sydney, rose over 2% to 24.59 Australian dollars, after declaring force majeure on Wednesday.

Chen Biao, managing director of Beijing-based commodity investor Jinjiang Mining Fund, told the Nikkei Asian Review on Friday that the global coal price was "not going to rise high in the long-run" due to lingering overcapacity in China, but he also noted that the price "may surge in the short term."

By contrast, shipping prices have been dragged down by the cyclone as many vessels have lost cargo orders in Australian ports. The global benchmark Baltic Dry Index dropped to 1215 on Thursday, more than a 9% decline compared to the end of March.

The index for capesize vessels, large-sized bulk carriers and tankers typically above 150,000 deadweight tonnage which are the major carriers for iron ore materials, has declined about 20% during the same period. While analysts saw the drop as being led by the slowdown in iron ore exports from Brazil to China, they also predict the cyclone disruption could cause a drop in shipping prices in the coming months for mid-sized, or panamax, vessels that mainly carry coal materials. Although the cyclone has already led many producers to cancel their number of shipments, repairs to rail lines are not expected to be finished anytime soon.

Average charter costs for a panamax vessel per day is around $11,000, which is roughly 70% higher from the low seen at the start of the year. The rise was supported by robust coal demand from China and South America's demand for exporting soybeans. However, charter costs could face downward pressure if supply disruptions in Australia continue.

Before the impact of the cyclone became clear, the outlook for shipping operators was more upbeat. At an earnings briefing on March 31, Huang Xiaowen, vice chairman of Cosco Shipping Holdings, said, "2017 has been better than last year," referring to an industry recovery since the beginning of the year.

In fact, the group reported net profit before interest and tax of 490 million yuan ($71 million) for January and February, helped by a 70% surge in cargo volume and a 10.6% increase in unit income for its container shipping business. The total throughput for its container terminal business rose 6.4% on the year.

Huang also added that "there were way too many 'black swan' events last year, but it has not been as worrying as one would imagine since we entered the first quarter." It appears that the lastest 'black swan,' Cyclone Debbie, will have changed the picture.

The share price of Cosco Shipping, the Hong Kong-listed arm of China Cosco Shipping, was down 9% at HK$3.61 on Friday from the recent high of HK$3.95 marked on Feb. 23.

Nikkei staff writers Mariko Tai, Kazumi Sakurada and Jennifer Lo in Hong Kong contributed to this report.


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