How the Australian Floods Impact the Global Commodity Markets
by Carl Delfeld, Global Equities and Emerging Markets Analyst
Wednesday, January 12, 2011: Issue #1426
As I write, Brisbane, Australia's third-largest city, is enduring the most devastating floods since 1974.
Evacuations are underway and estimates call for some 20,000 homes and businesses to be hit and for 200,000 people to be affected, as the floodwaters reach their peak today and tomorrow. The disaster has already claimed the lives of 10 people, with around 100 more missing.
Overall, the flooding in the state of Queensland covers an area of 350,000 square miles - larger than France and Germany combined.
The ETF that represents the Australian stock market - the iShares MSCI Australia Index (NYSE: EWA) - has responded by falling 4% so far this year.
But there's another huge problem, both for Australia and other countries around the world...
Why the Australian Floods Are Killing the Coal Market
Given Australia's huge commodity market - and its importance to the world - the flooding has rocked the sector.
Take its coal industry, for example. Queensland boasts about 40% of Australia's coal resources and accounts for 56% of production, which makes it the biggest hub for the country's coal exports.
The Market Vectors Coal ETF (NYSE: KOL) is up 4% over the past two weeks, as spot prices for metallurgical (coking) coal have risen by around 10%. With the price having passed $250 per metric ton, Helen Lau, an analyst at the Hong Kong offices of UOB Kay Hian, said prices of Australian coking coal exports may peak at $270 a ton in the coming weeks. But some forecasts call for the price to hit $300, depending on how long the flooding persists.
This is a critical issue, given that the impact of the flooding goes well beyond Australia...
Emerging Markets Set to Take a Hit From Australia's Coal Woes
Australia produces about 28% of the world's total traded coal and accounts for about 58% of metallurgical coal exports.
Japan is among the most exposed, as it receives about 80% of its metallurgical coal supply from Australia.
But emerging markets are in trouble, too. Coal is the lifeblood of their economic growth, with consumption humming along at a 7% annual clip. In China, for example, coal energy still fuels a massive 70% of its economy, despite the country's recent rapid buildup of nuclear fuel plants.
Like Japan, Taiwan also gets 80% of its metallurgical coal from Australia. South Korea and India will also feel the pinch, since they import 63% and 37% of their coal supplies from Australia, respectively.
The supply disruption isn't just a short-term blip either. The statistics are alarming...
- With coking coal stockpiles already low, the flooding could impact one-third of the world's coal exports.
- Authorities predict the loss of about 10% to 20% of coal production in the affected mines, which belong to major Australian mining companies like Rio Tinto (NYSE: RIO).
- More than 5% of the world's coal supply used in steel production won't make it to market as a result of the floods.
A $9 Billion Fallout
The direct costs to the Australian economy as a result of this disaster could total $9 billion, as many roads, bridges, railroads and mines will need repair or rebuilding.
And with yet more rain predicted in the coming days, the flooding also has significant implications on other commodities such as wheat, fruit, iron ore and sugar.
Wheat in Australia is normally harvested in January and February and heavy rains during the harvest season are among the worst things that can happen to a crop. Rain inhibits ripening and promotes mold and disease within the wheat.
Last year, Australia produced some 22.5 million metric tons (mmt) of wheat, with 14.5 mmt of that being exported - about 11% of global exports. It's estimated that the flooding has impacted more than half of the Australian wheat crop and with the transport infrastructure also damaged, the problems are compounded.
Even if the wheat can reach the market, the rain has reduced much of the crop from food to feed quality. In fact, some analysts expect Australia to lose a massive 90% of its harvest, which would truly be a market-moving development.
Needless to say, it's a terrible blow for Australia's growing economy, its businesses and the people affected. And as inflation becomes a bigger concern for the global markets this year, the floods' impact on the commodity markets bears watching.