•According to CRU's reports, "In 2010 the global seaborne metallurgical coal market totalled around 5m tonnes per week. Of this, just over 3m tonnes was supplied by Australia, with the vast majority of this coming from Queensland, plus a small amount from New South Wales. It should be noted that these figures understate Queensland’s overwhelming importance in premium hard coking coal and low volatile PCI markets. The principal destinations for Australian coking coal are Japan (~30%), India (~15%), China (~10-15%), Western Europe (~10-15%) and South Korea (~10%).

• A seasonal dip in exports of metallurgical coal from Australia during the first quarter is a relatively regular annual occurrence. However, the current disruption is certainly earlier than is typically the case. With the supply-chain from Australia being taut even at the best of times, any disruptions to supply tend to have an immediate impact on prices.

• In a worst-case scenario, we estimate that around 2.3m tonnes per week of metallurgical coal production could be lost from Australian operations currently under force majeure. Whether production losses are likely to reach these levels is questionable however, as some mines, particularly those underground, have been able to continue operating.

•With regards to the volume of material actually reaching the market, this may not be hit as hard as production as some mines will have the option of shipping from inventories. However, this assumes that transportation channels are open. What has differentiated this flooding from that seen in early 2008 is that entire rail corridors have been shutdown as a consequence or, at the very least, have had to run at reduced levels.

• With the exception of the key 66m tpy Blackwater rail line, however, most of the rail networks and all of the ports are now back in operation, albeit at rates well below capacity. Once crews are able to return to work, draining of flooded mines could take up to three weeks, although in some cases the damage is reportedly more severe (e.g. Cockatoo Coal’s Baralaba mine) and may take several months to repair.

• Assuming that further rainfall does not significantly exceed seasonal norms, last week (w/c January 3rd) and this week (w/c January 10th) are likely to see the worst impact of the floods on coal shipments.

Coking coal prices set to increase sharply • First quarter coking coal contract prices are already locked in at US$220-225/tonne, fob, depending upon quality, and it is clear that second and third quarter prices will be higher.A one month cessation to coking coal exports from Australia could equate to a total loss of around 10m tonnes, which is around 4% of the annual seaborne market. This would have the potential to cut world crude steel production by around 20m tonnes, which is equivalent to around 1.3% of annual world production. Of course, the actual impact on crude steel production will depend upon the extent to which steel mills can maintain output from their inventories of coking coal, and/or the extent to which other coal producing nations can fill the shortfall in steel mills’ coal requirements.

• Events in Australia have unfolded against a backdrop of tightness in all steelmaking raw materials markets. Not surprisingly coking coal related cost-push pressures are driving coke prices higher. Meanwhile, iron ore prices remain at elevated levels due to reduced supply from India.

There have been limited shipments to China in recent months, following a ban on exports from the Indian state of Karnataka in the west and heavy rains in the east. Scrap prices are also rising sharply as still low utilisation rates in the developed world manufacturing sector, coupled with unusually harsh weather conditions in the Atlantic basin, have hit supply."