May 13 (Bloomberg) -- At about 1 a.m. on Jan. 19, some of the heaviest rains in a century caused the Nogoa River in Queensland to burst its banks, sending 32 billion gallons of water into one of the largest coal mines in Australia.
``It was like watching Niagara Falls,'' said Peter Westerhuis, 46, general manager of operations for the mine's owner, Ensham Resources Pty. ``It filled the whole pit up in five hours.''
Almost four months later, two of Ensham's six coal mines, along with others owned by companies including Melbourne-based BHP Billiton Ltd., remain submerged. The greatest damage was in the Bowen Basin, the source of 40 percent of the world's steelmaking coal. As production fell, the price of coking coal tripled to a record $300 a metric ton last month, raising costs for the steel that goes into automobiles, airplanes and washers.
``There are only a couple of key producing coking coal regions in the world and this is the key one,'' said Mark Pervan, a commodity strategist with Australia and New Zealand Banking Group Ltd. in Melbourne. ``Anytime you put that sort of supply under a question mark, it's no surprise we have extremely high prices.''
The region's coal production this year may decline by as much as 15 million tons, or about 12 percent of Australia's annual exports, Macquarie Bank Ltd. analyst Jim Lennon said in a May 5 report. Meanwhile, global demand for steel will rise 6.7 percent this year, led by an 11.5 percent increase from China, according to the Brussels-based International Iron and Steel Institute.
`Huge Impact'
``When you look at it from a supply point of view, it is a huge impact,'' said Gerard Burg, a minerals and energy economist at National Australia Bank Ltd. in Melbourne.
The rise in coal's cost, combined with record contract iron ore prices of at least $79 a ton, will add $160, or 18 percent, to the average cost of producing a ton of the grade of steel used in cars and appliances this year, according to Lennon's report.
In response, Asia's leading steelmakers, including Japan'S Nippon Steel Corp., China's Baoshan Iron & Steel Co., South Korea's Hyundai Steel Co. and Posco, Asia's third-biggest producer, all raised prices last month. Tokyo-based Nippon, the world's second-largest steel producer, agreed last month to pay $300 a ton, a threefold increase, for coal from the Bowen Basin.
Effects in Europe
The effects of Australia's flood also reached Europe. Luxembourg-based ArcelorMittal, the world's largest steelmaker, said last month it would add a surcharge of $250 a ton on some fixed-price contract shipments.
The average price for hot rolled coil, a benchmark steel product, will rise by $311 to $904 a ton this year because of the increase in raw materials costs, according to Lennon's report. Hot-rolled sheet steel used to make consumer products has already more than doubled in price in the past five years.
Toyota Motor Corp., Japan's biggest automaker, raised prices for some models in North America this month because of the jump in steel costs. The retail price for the Prius hybrid car will increase by 1.8 percent to $21,500, and a Yaris sedan, by 1.6 percent to $12,425, Toyota said May 4.
Prices for coking coal may rise again next year because of the extent of the flooding damage in Australia. Coal supplies are ``likely to remain extremely tight over the next 2-3 years,'' and the price may increase to more than $350 a ton in 2009, Credit Suisse Group analysts said in an April 28 report.
Widespread Disruption
``You are talking months here, not weeks,'' Ensham's Westerhuis said, referring to his timetable for repairs. ``This will be the biggest obstacle anybody has ever faced anywhere running a mine.''
Most of the 33 coal mines in the Bowen Basin lost production as a result of the floods, the Queensland Resources Council said.
Other companies with waterlogged mines include London-based Rio Tinto Group, the world's third-largest mining company, which last month reported a 27 percent quarterly decline in coking coal output and said shipment delays would continue.
BHP-Mitsubishi Alliance, the world's top exporter of coking coal, said output declined 25 percent in the quarter ended March 31. Limited coal production has resumed as repairs continue, the company said last month. BHP-Mitsubishi is a joint venture of BHP Billiton, the world's biggest mining business, and Tokyo-based Mitsubishi Corp., Japan's largest trading company.
Australians selling water removal equipment, on the other hand, are bullish.
``Business is fantastic,'' said Dave Miller, 38, the owner of Total Water Management in the Queensland coastal town of Mackay whose pumps are bailing water from the biggest mines in the Bowen Basin.
The Ensham mine, owned by Japanese oil refiner Idemitsu Kosan Co., won't be fully operational until early 2009 as it continues the cleanup, President Akihiko Tempo said in March.
About a third of the 32 billion gallons in the pits have so far been removed and deposited back into the Nogoa River.
``It might take a year to get 100 percent operation back at these affected pits,'' Westerhuis said.
