Cyclone Debbie fuels strongest rally in Newcastle thermal coal prices since Yasi in 2011

They say the past is a good guide to the future, providing a map by which to navigate unknown terrain ahead.

This may be so with regard to the impact of Queensland cyclones on prices for Australian thermal coal shipped from the port of Newcastle, the main reference point for the trade, according to an analysis using S&P Global Platts data.

Examining the effects of recent category-five cyclones – the most destructive on a five-point scale in terms of winds speeds – to have crossed the Queensland coast in the past seven years provides some interesting insights.

Queensland has experienced three category-five cyclones in that recent period – Yasi in February 2011, Marcia in February 2015, and the latest Debbie in March 2017.

Also read: Situation room: Cyclone Debbie hits world’s metallurgical coal capital

By analyzing prices for Newcastle thermal coal one week before each cyclone crossed the coast of Queensland, as well as on the day of landfall, and at intervals of one, four, ten and 20 weeks after each event we can get a general sense of the price impact of a category-five cyclone.

Yasi has a significant place in Queensland cyclone folklore as at 600 km in diameter the weather system was comparable in size and force to hurricane Katrina that devastated the US city of New Orleans in 2005.

Contemporary analyst reports stated that Yasi caused about 15 million mt of Queensland coal exports to be delayed from entering the seaborne market in the period January-March 2011, but this figure included the effect of flooding to the state’s coalfields from an extensive wet season.

In comparison, coal market analysts estimate cyclone Debbie will have a much greater impact on export volumes from Queensland in the region of 15 million to 20 million mt, including between 2 million to 5 million mt of thermal coal.

One week before the arrival of Yasi on the Queensland coast on February 3, the price of Newcastle 6,000 kcal/kg NAR thermal coal for shipment in the next 7-45 days rose 5.6% to $131.50/mt FOB, according to Platts’ data.

Newcastle spot prices quickly retraced only one week after Yasi by 5.7% to $124/mt FOB, but they were soon back up to $133/mt four weeks post landfall, an increase of 7.5% for the period.

They remained elevated for the rest of 2011, never sinking below $100/mt FOB Newcastle, though some of this price firmness may have derived from the effect of Japan’s Fukushima-Daiichi nuclear plant accident on March 11 that left Japan without any nuclear power generation.

Cyclone Marcia was estimated at the time to have temporarily withheld 5 million mt of Queensland coal exports from the market, a smaller amount than either Yasi or Debbie.

In terms of Newcastle market pricing, Marcia’s effect was near negligible for Australian thermal coal as spot prices remained level in the week lead-up to its landfall on February 20, 2015 at $61.65/mt FOB Newcastle, according to Platts data.

One week after Marcia’s arrival in Queensland, FOB prices at Newcastle port for the 6,000 kcal/kg NAR grade had risen only 2.2% to $63/mt, but went on to fall 7.1% to $58.50/mt four weeks later.

For cyclone Debbie, its impact on Australian thermal coal prices has been greater than Marcia, but less than Yasi, as Platts price data shows.

Newcastle 6,000 kcal/kg NAR prices climbed 3.5% to $83.35/mt FOB in the week leading up to Debbie crossing the Queensland coast on March 28, and went on to climb another 7% in the week after to $89.25/mt, said the data.

So we can see from this analysis that prices for Newcastle 6,000 kcal/kg NAR export-grade thermal coal tend to rise by a margin of 3.5-5.6% in the week leading up to a cyclone making landfall in Queensland.

This is possibly because market participants take positions ahead of a large cyclone event in Queensland, to safeguard against disruption if they are buyers, or to maneuver into a profitable position if they are traders by buying extra cargoes.

Post one-week from the arrival in Queensland of the last three category-five cyclones, market prices for Newcastle thermal coal have shown mixed reactions, rising between 2.2% and 7% for Marcia and Debbie, though falling by 5.7% in the case of Yasi.

Recalling that the impact of Debbie on Queensland coal shipment volumes stands to be larger than Yasi, it is possible that prices for Australian thermal coal could stay relatively firm for some weeks yet going by previous pricing trends.