The price of steel is expected to rise as floods in Australia choke the production of coking coal. Still, developed nations are unlikely to see a drastic hike in the price of consumer goods.
Australia coal fuels more than half the world's steel production
Industrial companies in Germany are bracing for a hike in global steel prices as floods continue to affect mines in the Australian state of Queensland
Australia supplies 59 percent of the coking coal used to fuel steel mills around the world. Asian mills in particular rely on coal shipped from Queensland.
"Seventy-five percent of our mines are currently not operation because of this flood," Queensland Premier Anna Bligh told reporters. "So that's a massive impact on the international markets and the international manufacture of steel."
Some mines are flooded and could take months to get back into operation, while others are simply cut off from transport infrastructure. The full extent of damage is yet unknown.
Analysts say coal prices on the spot market – where purchases are made without long-term contracts – have already risen by 10 percent to break through the US$250 barrier. This is expected to put upward pressure on quarterly contract prices negotiated between producers and their major customers.
Higher steel prices are likely to last until Australia's infrastructure is repaired
Eugen Weinberg, head of commodity research at Commerzbank, pointed out that with railway infrastructure damaged, higher prices may last for some time.
"It's not like some other producer can jump into the role of Australia and export to the Asian market," he told Deutsche Welle. "The supplies are not readily available."
German steel producer ThyssenKrupp announced on Tuesday that it plans to charge customers more to compensate for additional production costs.
"Resource inputs make up more than 80 percent of the cost of producing steel," a company spokesman said.
Since early 2010, steel producers have started buying raw materials using quarterly contracts instead of locking prices in for an entire year. That change in contract length was pushed forward by the coal industry, which wanted to pursue the lucrative spot market more aggressively, according to Weinberg.
Weinberg said he doesn't expect this disaster and shortage to change that arrangement, but that he thinks the "proportion of the spot market will continue to increase in the future."
In 2008, major floods in Queensland caused spot coking coal prices to jump from US$125 a ton to more than US$300.
Developed nations less affected
High demand and prices have led to diminished stockpiles for both the spot and contractual markets, meaning an imbalance between supply and demand is inevitable, Weinberg said. However, consumers in most developed nations aren't likely to see a significant hike in the prices of goods with steel components.
ThyssenKrupp says extra costs will be borne by its customers
"The impact of the commodity prices in the OECD countries is relatively low," he said. "In most cases the price of the end product depends on the labor costs and on the rent costs… Still, they might add to the inflationary pressures already seen due to the higher transportation costs and higher fuel costs."
Commodity-based economies are more significant in emerging markets than in developed countries, he added. But European steel producers may hike prices in response to lower supplies of Chinese steel on world markets.
Author: Gerhard Schneibel
Editor: Sam Edmonds