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Coal Prices Soar Following Australian Floods, But Re-Insurance Market Relatively Unaffected

By Charlotte Dudley | Fri, 07 January 2011 17:02 | 0

Widespread flooding in northern Australia has caused economic disruption and sent coal prices soaring, but reinsurers are likely to avoid heavy losses, according to industry participants.

Dom del Re, a London-based director at risk advisory company RMS, said the recent floods in Queensland, in Australia’s north east, will not have as great an impact on the global reinsurance market as last year’s earthquakes in Chile and New Zealand.

The two events were among the costliest in terms of insurance losses, with Swiss Re putting the bill for last February’s Chilean earthquake at around $8 billion.

Although the flooded area of Australia is large – approximately the size of France and Germany – its sparse population means insurance losses will be low, del Re said.

Despite the impact of the floods – which have forced out residents, damaged crops and shut down mines – Australia is increasingly attractive to the global reinsurance market as insurers seek to expand portfolios and spread risk, del Re said.

John Carroll, a Sydney-based senior vice-president at reinsurer broker Guy Carpenter, said the Queensland floods are not expected to have a significant impact on the reinsurance market but the events may heighten awareness of the broad scope of perils covered in Australian catastrophe reinsurance placements, such as earthquake, cyclone and floods.

“As original coverage for flood in domestic policies is not standard in the industry, this will lessen the likely reinsurance impact,” he said. “To put into context, whilst the economic impact of this event will be significant, it is expected that this event would have similar (or potentially less) impact on the reinsurance market than the hail storms in Melbourne and Perth in March 2010.”

Insured losses for the Melbourne and Perth storms totalled US$1.515 billion, Guy Carpenter said.

It is not yet clear how much the insured losses from the floods will be. However, Shane Oliver, chief economist at AMP Capital Investors, estimates the floods could cost up to A$7 billion (US$6.9 billion) in lost coal and agricultural exports.

A spokesman for Munich Re said it will be around two weeks before the full impact of the floods can be assessed.

Whatever the cost, the disruption is good news for those coal producers unaffected by the flooding.

While flooding impacted around three quarters of coal mines in Queensland, halting operations and blocking rail and road access points, coal miners in New South Wales, south of Queensland, will benefit from higher prices, and the share prices of US coal producers have surged.

Other coal markets such as those in Columbia and South Africa are also set to benefit as buyers look for supply elsewhere.

Analysts say Australian coking coal – the type used for steel making and currently priced around US$225 a tonne – could rise to more than US$300/tonne as the floods put pressure on demand. The price of thermal coal, used to generate electricity, is also tipped to increase.

In the US, the price of coal jumped 11% in the last week, with the benchmark contract for Central Appalachia coal hitting a 25-month high of US$83.45/tonne, the Wall Street Journal reported on Monday.

And in Europe, rising coal prices have put pressure on power generator profits. Analysis by Bloomberg showed German profits from coal-generated power tumbled more than 30% in the wake of the Queensland floods.

By. Charlotte Dudley

Source: Environmental Finance

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