Trickle-down

Australian floods: It will be some weeks before the cost of Queensland's devastating floods becomes clear. But when it does, it is likely that the hit – which could reach $13 billion by some early estimates – may fall partly, if indirectly, on Australia's miners.

Miners have already felt the brunt of the disaster. Coking coal producers in Queensland, a state which accounts for almost 60 per cent of global exports, have been brought to a virtual halt. Pits accounting for two-thirds of the state's annual output have declared force majeure on some or all of their production, according to Reuters analysis.

 

The pain will mostly be temporary. Prices of metallurgical coal are set to spike following the floods, with Citi now estimating a 33 per cent hike on year-end levels. For Queensland's miners, that should provide part compensation for lost revenues, and that might explain why BHP Billiton and Rio Tinto shares had largely recouped earlier market losses by January 12. But the economy at large will still shoulder costs, though the actual fix-up bill is hard to even guess. Central banker Warren McKibbin suggested the bill could equal one percent of GDP - or $13 billion. A JPMorgan analysis puts the total at around half that amount.

A sum of that order would dent Australia’s finances, despite the fact they are getting stronger. True, the central government runs a persistent deficit. But new Prime Minister Julia Gillard has promised to reduce it by 2013. And after a promising start — the deficit was set to fall from 4.5 percent to 2.8 per cent of GDP this year, according to HSBC estimates before the floods — Gillard will find it hard to let that target slide.

That’s where the miners come in. Politicians are still mulling plans for a super-tax on producers’ boom-time profits. Back in July, miners seemed to have the upper hand: their lobbying saw Gillard temper the measures considerably, cutting the estimated tax take by some $1.5 billion a year. With the floods adding extra strain on the budget, those concessions may be clawed back.