Sydney: Australia’s devastating floods will affect BHP Billiton’s coal mining operations for at least six more months, the company warned on Thursday, with its last quarter production already down a third in hardest-hit Queensland state.
BHP Billiton, the world’s biggest mining company, also posted a 4% rise in quarterly output of iron ore to record levels to meet swelling demand from its main customers in China and other parts of Asia.
Flood damage estimates are bound to worsen, as Thursday’s figures do not reflect the impact of January storms brought by a La Nina weather pattern that may still bring more rain to Queensland.
“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.”
The wet weather has driven long-term pricing for coking coal as high as $225 per tonne for the first quarter of 2011, and some analysts say the floods could result in coal prices between $400 to $500 per tonne.
“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 Billiton said in releasing its fiscal second-quarter production data, which covers the October-December period.
In a joint venture with Japan’s Mitsubishi Development Pty Ltd, BHP Billiton is the world’s largest supplier of sea-borne traded hard coking coal, needed to make crude steel.
The statement was the most detailed publicly on the impact of the floods on the company’s collieries since the rains started in November, leading BHP Billiton and other miners to postpone shipments and make force majeure declarations to break sales contracts.
“Queensland Coal (Australia) production was significantly affected by the persistent rain and flooding that impacted the Bowen Basin during the period,” BHP Billiton said, adding that output of coal 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, 90% of that contributed by Queensland, is prompting Asia’s steelmakers to look to other countries for supplies. Japan’s JFE Steel Corp , the world’s fifth-biggest steelmaker, this week said it will boost purchases from the United States, China, Russia and Indonesia. JSW Steel Ltd , India’s third biggest steelmaker, has said it was also turning to US suppliers for more coal.
BHP confirmed that force majeure was declared for the majority of Bowen Basin coal, including at its Goonyella Riverside, Peak Downs, Norwich Park, Gregory Crinum, South Walker and Blackwater operations.
Meteorologists say the rains that devastated huge areas of Australia’s eastern seaboard, flooded coalfields and cut off shipment corridors for miners clustered in the inland Bowen Basin were triggered by a La Nina Pacific weather pattern that only recently peaked and threatens more wild weather.
“The drop in output BHP is reporting today really only covers the period before the real flooding began in January, which did the most damage,” Patersons’ Harrington said. “That won’t show up until the end of this quarter.”
Energy firm Santos , which recently approved its $16-billion Gladstone liquefied natural gas (LNG) investment in Queensland, also said extensive rains across Australia sharply cut its 2010 output and hit some coal seam gas exploration.
The heavy flooding in Queensland did not impact coal seam gas production but field construction and drilling activity were suspended, it said.
Santos gave a final go ahead for Gladstone LNG earlier this month, in a project that would bring Australia one step closer to becoming the second-largest LNG producer by 2020 as producers try to meet growing demand from Asia.
Record iron ore output
Iron ore is expected to account for more than $5 billion in first-half earnings for Melbourne-based BHP Billiton, nearly three times forecast EBIT earnings from coal mining.
Most analysts expect BHP to show underlying earnings above $10 billion for the half-year ended 31 December.
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.
Rio Tinto also reported this week record iron ore production after running its mines at peak rates in 2010.
“For the likes of BHP and Rio Tinto, iron ore is where the money is right now,” said Keith Goode, an analyst for Eagle Mining Research.
Spot iron ore prices are at nine-month peaks and nearing the record $200 a tonne level from February 2008. “I don’t expect to see a massive hike in global steel demand but there is this constant underlying need for steel,” said Michael Gaylard, strategy director at Freight Investor Services in Shanghai. “And if you have iron ore supply that is restricted, it is going to prompt people to take on board maybe slightly higher reserves now than they possibly would do at another time due to potentially where prices would be in two months down the road.” The sharper-than-expected fall in coal output and lower copper prices overnight helped drive BHP’s shares lower.
BHP Billiton shares fell nearly 2% to A$45.15, after the data was released, while Rio Tinto was down as much as 2.3% to $85.57, outpacing losses in the wider market .
Aluminium production was in line with previous comparable quarters, BHP Billiton data showed.
Aluminum prices , which slumped dramatically during the global recession, rose 11% last year -- 5% in the December quarter alone -- and are now near a two-year peak.
BHP Billiton 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.
“Our current expectation is that production volumes for the 2011 financial year will be in line with the 2010 financial year,” it said.
The company’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.
“Robust growth in developing economies remains the primary driver of commodity demand and further positive signs are emerging in the United States following the Federal Reserves ongoing efforts to stimulate the economy,” BHP Billiton said.
Existing supply side constraints on industrial commodities has been further exacerbated by weather-related disruptions in Australia, Colombia, South Africa and elsewhere, according to the company.