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Australian cyclone may disrupt met coal market

While President Donald Trump is rolling out efforts to help coal on a domestic front, a cyclone hitting Australia could prove more pressing in the short-term for U.S. producers.

Cyclone Debbie has struck the northeastern coastline of Australia, an area that plays a key role in metallurgical coal markets. In a note on March 27, FBR & Co. analyst Lucas Pipes noted a range of scenarios from minor supply disruption at the Abbot Point export terminal with little effect on pricing all the way through an extended coal supply disruption reminiscent of 2010 and 2011 when metallurgical coal prices boomed to over $300/tonne.

"Given the size of the cyclone (upgraded to Category 4 overnight) and the proximity of the expected landfall to the heart of the coal fields, there is little doubt that some amount of supply will be disrupted due to the weather event," Pipes wrote. "The question is how extensive the damage will be to the rail lines and mine infrastructure once the storm has passed."

Several coal operations suspended operations in response to the storm.

To see the sort of price spikes seen several years ago, Pipes noted, the cyclone would need to again literally put coal operations underwater. Pipes said FBR will be monitoring the situation over the next two days.

"Cyclone Debbie appears to be hitting slightly too far to the north for the worst rain to hit the coal fields directly," Pipes wrote. "This somewhat lowers the probability of a 2010/2011 type of event. However, the storm is forecasted to turn south once it has made landfall, so we believe that it is also too early to rule out the possibility of extended damage directly within the coal fields."

Even without the worst of the rain directly hitting the coalfields, Pipes said a medium disruption of two weeks to a month could occur if rail lines are washed out or bridges are damaged as repairs could take weeks or month. If the storm affects only Bowen and the surrounding area, Pipes noted, about 13% of supply could be disrupted for some time.

A larger export terminal 120 miles south of Bowen in Queensland, Dalrymple Bay and Hay Point, is reportedly unlikely to be affected. Should this export facility be affected, either directly or by damage to infrastructure, Pipes noted the "short-term price response could be substantial."

Pipes noted that while minimal damage would likely mean met coal prices would be largely unaffected outside of near-term spot markets, the probability of damage to rail infrastructure in the area around Bowen is "high."

The last time metallurgical coal prices spiked in response to an extreme weather event, many U.S. coal companies took on a lot of debt to increase metallurgical coal assets including Alpha Natural Resources Inc., Peabody Energy Corp., Walter Energy Inc. and Arch Coal Inc. Each were pushed into bankruptcy reorganization a few years later.