Asia Steel Makers See Impact If Australian Floods Continue Longer

Asian steel makers have yet to see a fall in production despite some disruption to coking coal supply from Australia, but if it takes months before Queensland's coal export infrastructure is restored to pre-flood conditions, the impact could potentially extend far beyond what is being felt now.

Energy consultants Wood Mackenzie warned Thursday that mine stockpiles, which are currently supporting the bulk of current shipments in the absence of new mine production, were likely to be exhausted during the second week of January.

"While some areas appear to be returning to normal... the likelihood of continued heavy rain over the short term could place further stress on the fragile infrastructure," Wood Mackenzie analyst Ben Willacy said, adding, the company expects at least 46 Australian mines to be impacted by rain and flooding.

In Moranbah, a mining town at the heart of the Bowen Basin coal producing region in Queensland, December rainfall was the highest in nearly 30 years, with 350 millimeters falling during the month against an average level of 102 mm.

Around a third of the 172 million metric ton-per-year sea-borne trade in hard coking coal is mined from the Collinsville Shelf, a single 250-kilometer geological formation stretching to the north and south of Moranbah. All 18 mines on the seam have been hit to differing degrees, according to mining companies and local contractors.

BHP Billiton Ltd. (BHP), Xstrata Plc (XTA.LN), Rio Tinto Plc (RIO.AU), Anglo American Plc (AAL.LN) and Peabody Energy Corp. (BTU) have all declared force majeure on their production from the region over the past month, and analysts and local contractors said the impact could last months despite clearer weather conditions in recent days.

"We do not source our coke from Australia, so we are insulated to an extent," India's Essar Steel Chief Executive Malay Mukherjee said. But overall coke and coking coal prices may rise in the January-March quarter as a fallout of the floods, he said.

Disruption to mining and transportation could drive prices of spot hard coking coal up to $350 a metric ton from current levels of around $250 a ton, Commonwealth Bank of Australia said in a report Thursday.

But for now, most steel producers said they haven't been forced to cut production at their plants.

"Generally speaking, we have enough iron ore and coal stocks for one month of production," a spokesman for Japan's JFE Steel Corp. (5411.TO) said, adding this didn't include shipments already on their way from Australia.

A spokesman for Nippon Steel Corp. (5401.TO) said the company has "at least" one month's supply in stocks. He declined to reveal how much the company buys from Australia, but local industry data show Australian supply constituted 60% of the coal used by Japanese steel makers.

South Korean steel maker Posco also said it's operations haven't been affected so far.

"We are seeing no short-term impact from Queensland's floods as we have a coking coal inventory of more than one month in the yards," Posco spokesman Chung Jae-woong said.

In China, Zhang Chi, a media official for Baosteel Group Corp., the country's second-biggest steel maker by volume said coal supply from Australia has been affected, but the company's operations are continuing without disruption as it has enough stocks for now. Baosteel is the unlisted parent of Shanghai-listed Baoshan Iron & Steel Co. Ltd. (600019.SH).

Australia accounts for only about 38% of the coking coal used by Chinese steel mills, with the rest coming from Indonesia, Mongolia, Russia, the United States and Canada.

Moreover, China is set to produce more than 3.2 billion tons of coal this year, making domestic production a key component of overall supply. About a seventh of this is coking coal, leaving imports less of a concern for Chinese steel mills.

Wan Yi, board secretary at Wuhan Iron & Steel Co (600005), the listed unit of China's third-largest steel maker by output, said the flooding has had little impact on it operations as the company buys most of its coal from domestic producers.

Same was the case with Shougang Group Corp, which spokesman Wu Jianxin said "barely imports coal from Australia." Unlisted Shougang Group is one of the top ten Chinese steel makers.

Some Indian steel makers said they have stocks to last more than two months.

"We have not experienced any delays in supply so far. Even if there is a delay, we have sufficient stocks for around two and a half months," Bhushan Steel (500055.BY) Chief Financial Officer, Nittin Johari said. Spot prices may rise following the floods "but quarterly contract prices will not see much impact," Johari said.

JSW Steel (500228.BY) Director Jayant Acharya said the company would be able source coal from South Africa and the U.S, should there be a fall in supply from Australia.

Gujarat NRE Coke, India largest producer of coke, said the company's two mines in Australia's New South Wales state were not affected by rains so far.

But the floods have boosted demand and raised prices of coking coal as well as coke, said Pavan K. Agarwal, senior vice-president of Gujarat NRE Coke. "Over the past ten days, coking coal prices have soared 15% to 20% because of the floods," he said.

(David Fickling in Sydney, Kyong-Ae Choi in Seoul, Kazuhiro Shimamura in Tokyo, Yajung Zhang and Chinwei Yap in Beijing, Yue Li in Shanghai, Prasenjit Bhattacharya in New Delhi and Swansy Afonso in Mumbai contributed to this report.)

-By Denny Kurien, Dow Jones Newswires; [e-mail]; [phone]