SYDNEY Eastern Australia's devastating floods will hit production and sales at BHP Billiton's (BHP.AX) (BLT.L) coal mining operations for at least six more months, the company said on Thursday, after output in Queensland state fell by a third last quarter.
BHP also posted a 4 percent rise in quarterly output of iron ore from western Australia to record levels to meet swelling Chinese demand that is driving spot prices for ore to nine-month peaks of close to $200 a tonne.
The coal outlook was the most detailed the company has released since heavy rains started in November, prompting BHP and other miners to postpone shipments and make force majeure declarations to break sales contracts.
Damage estimates are sure to rise since the October-December figures do not take into account the worst of the flooding in Queensland in January.
"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."
COAL PRICES DRIVEN UP
BHP is the world's largest supplier of sea-borne traded hard coking coal via a joint venture with Japan's Mitsubishi Development Pty Ltd. Most of Australia's coking coal, which is used to make crude steel, comes from Queensland.
The wet weather has driven long-term pricing for coking coal as high as $225 per tonne for the first quarter of 2011.
Macquarie Bank forecasts coking coal prices may rise by more than 22 percent in the second quarter to $275, while consultants Wood Mackenzie said prices could exceed $400.
"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 said in releasing its fiscal second-quarter production data.
"Queensland Coal (Australia) production was significantly affected by the persistent rain and flooding that impacted the Bowen Basin during the period," BHP said, adding that output of coal dropped 30 percent versus the previous quarter.
That is significantly more damage than the 6 percent loss in coking coal production close peer Rio Tinto (RIO.AX) (RIO.L) 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, has forced Asia's steelmakers to look elsewhere for supplies.
"If the problems continue more than what we have built (up) in our inventory, it might become overwhelming. The major issue would be securing prices not volumes, meaning a higher cost to us," said an executive from South Korea's No.2 steelmaker, Hyundai Steel.
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."
Separately, rail operator QR National QRN.AX said all systems in its central Queensland coal network had reopened after the badly-damaged Blackwater line restarted late on Wednesday.
But QR National still expected overall coal haulage volumes to be down 15 million to 20 million tonnes in the first three quarters of 2010/11 while repairs continue.
BHP relies on the Blackwater line to haul some of its coal, as do Wesfarmers (WES.AX), Rio Tinto and Xstrata XTA.L.
RECORD IRON ORE OUTPUT
Iron ore is expected to account for more than $5 billion in first-half earnings for Melbourne-based BHP, 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 December 31.
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.<IRONORE/>
"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 shares fell nearly 2 percent to A$45.19, while Rio Tinto (RIO.AX) (RIO.L) dropped 2.3 percent to $85.57, with both stocks outpacing losses in the wider market .
BHP's aluminium production was in line with previous comparable quarters, BHP Billiton data showed.
Aluminium prices, which slumped dramatically during the global recession, rose 11 percent last year -- 5 percent in the December quarter alone -- and are now near a two-year peak.
BHP 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.
(Additional reporting by Manolo Serapio Jr in SINGAPORE and Cho Mee-young in SEOUL; Editing by Dean Yates)