A street sign is seen partially covered by floodwaters near Rockhampton, Australia Jan. 3, 2011DANIEL MUNOZ
Devastating floods that are causing havoc for residents in northeastern Australia are also interrupting the production and export of key commodities from a region that is crucially important in the trade of raw materials.
Several coal mines in Queensland have shut down, shipments of wheat from the region are stalled, and even exports of sugar are in jeopardy as ports are closed. Consequently, prices for those commodities are rising, benefiting some Canadian producers, at least in the short run.
With open-pit coal mines flooded, and rail and ship transport disrupted, several Australian coal mining firms have cancelled shipments and declared force majeure -- essentially saying they can't be held to signed contracts because of an "act of God." Since the Bowen basin in central Queensland produces more than one-third of the world's metallurgical coal, and the global demand for coal is on the rise, spot prices have pushed higher in the past few days.
Most of the coal being shipped in the first quarter has already been priced at about $225 (U.S.) per tonne, said Meredith Bandy, a coal and mining analyst at BMO Nesbitt Burns, but the spot price is now above $240. Those levels won't likely last the full year, but companies that can get the higher prices in the meantime will do well, she said.
"In the short term it's positive for anybody who can ship their coal," said Ms. Bandy. Canadian companies are in a good position to take advantage of that, she said, because "Canada has some of the least logistically-challenged coal mines."
Of the three main publicly-listed Canadian coal companies, only one traded Monday: Teck Resources Ltd., which has its stock on the New York Stock Exchange as well as the TSX (which was closed for the New Year's Day holiday), rose 2.4 per cent to $63.30.
The Australian flood is the latest of many weather-related catastrophes to have disrupted lives -- and commodity markets -- in recent months. According to German-based insurer Munich Re, last year had the second highest number of natural catastrophes since 1980, and most were related to the weather. These provide "further indications of advancing climate change," the insurer said.
The flood's impact on prices also highlights how a recovery in the world economy, driven by resource-hungry nations such as China, has removed some of the slack in commodity production that existed during the sharp downturn of 2008-09.
Australia is one of the world's largest wheat exporters, and the recent floods have further damaged a crop which was already diminished because of earlier wet weather. Harvesting has been delayed, and shipments already in the works are not getting to the ports.
Wheat futures hit a five-month high on Monday, at just over $8 a bushel for March delivery. Cold weather in the U.S. Midwest also helped buoy the prices.
Because of the problems in Australia, there could be greater worldwide demand for wheat from North America, said wheat specialist Mike O'Dea, a risk management consultant with FC Stone in Kansas City. But he cautioned that weather conditions later this year in many other producing countries will be the crucial determining factor for prices over the longer term.
Wheat prices peaked at around $8 during the middle of the summer of 2010, when it looked liked drought in Eastern Europe was going to severely curtail supplies. But the price fell back significantly later in the year when other countries took up the slack.
That volatility could again be the pattern with both coal and wheat, said Aaron Fennell, portfolio manager and senior market strategist with Lind-Waldock, the retail commodities brokerage arm of MF Global Canada Co.
Mr. Fennell noted that floods and other disasters that gain wide media visibility often produce dramatic short-term market reactions that don't last. "Generally, in the marketplace there is an over-reaction to most of these types of events," he said. In particular, if transportation is the key problem, eventually the commodities will be delivered and the markets will quickly stabilize.
Doug Porter, deputy chief economist at BMO Nesbitt Burns, said the near-term outlook for the global economy -- which is increasingly positive -- will have more impact on commodity prices that any supply disruptions, even serious ones.
He noted that Australia has been dealing with drought conditions that have hurt its wheat harvests for several years, so its production levels were already diminished.
"Overall, I don't believe the floods will make a lasting impact on the overall commodity complex," Mr. Porter said.