It is reported that as coal companies operating in Queensland continue to raise the white flag to nature and declare force majeure, expect steel mills to stock up on metallurgical coal and drive prices higher.

The reason the Queensland floods are making business headlines around the world is because its Bowen Basin region supplies up to 40% of the world's demand for coking coal, which is a key ingredient in making steel.

More than two months of torrential rains in Australia's Queensland state, the world's largest exporter of coal for steel making, have left collieries underwater, rail lines inoperable and coal ports running at a trickle.

The Australian Bureau of Agricultural and Resource Economics and Sciences has begun factoring in a rise of about 8% on last year's contract prices for hard coking coal for March 2011. In its December 2010 quarter report, the bureau predicts coking coal customers will soon have to pay at least USD 225 a tonne as compared with an average of USD 215 a tonne last year.

However, that estimate was published before flood swept across Queensland and the number of companies to declare force majeure has risen as rain continues to fall. They include the BHP Billiton and Mitsubishi JV, Rio Tinto, Xstrata Coal, Peabody Energy, Macarthur Coal, Anglo Coal, Cockatoo, Wesfarmers and the Aquila and Vale JV.

China and India alone demand about a quarter of Australia's total production of coking coal. But if Australia's coal companies cannot produce the goods then the likes of China and India will look to the likes of Canada and Russia to meet the shortfall.

Spot prices for coking coal are at around USD 250 a tonne, more than 10% over the industry benchmark USD 225 tonne FOB Australian ports negotiated between BHP Billiton and Japanese steelmakers for the first quarter of 2011.

Pressure to find coal elsewhere is now expected to lift spot prices close to USD 300 a tonne in the next few weeks, a level last seen when Australian collieries flooded in 2008.

The jump in spot prices is expected to lead to higher second quarter contract prices, which are based on average daily spot prices over the previous three months.

(Sourced from www.smh.com.au and Reuters)