Queensland floods: The economic impact

Special Report January 2011 Queensland floods: The economic impact Queensland s share Forecasts for Australia...of Australia s economy 20% GDP rise in 2010-11 2.6%...of global coking coal exports 60% Unemployment in June 2011 4.7%...of Australia s fruit and vegetable production 28% Reconstruction cost $10bn IBISWorld has downgraded its GDP forecast for 2010-11 from 2.9% to 2.6% The floods in Queensland and the rest of Australia have besieged an area larger than France and Germany combined. The floods will have a significant impact on the Australian economy, in addition to world commodity and agriculture prices. No longer the poor cousin of the more prosperous southern states, Queensland accounts for approximately 20% of the Australian economy, 60% of global coking coal exports and 28% of Australia s fruit and vegetable production. As a result of the floods, IBISWorld has downgraded its GDP forecast for 2010-11 from 2.9% to 2.6%. The floods are expected to have a negative short-term effect on economic growth. IBISWorld estimates that the floods will subtract 0.6 percentage points from our previous GDP forecast for the third quarter of 2010-11 (which ends March 31). IBISWorld estimates that the floods resulted in $2 billion in lost coking coal production. However, spot prices are rising for coking coal and are expected to reach US$350 to US$400 per tonne, which is likely to result in contract prices averaging US$300 in March. This rise should partially compensate miners for lost production. Agriculture will also be hit hard, with an estimated $1.6 billion worth of crops having been destroyed. Sugarcane, cotton, some vegetables and grains have suffered major losses. This is expected to flow on to a short-term price spike for food, with prices expected to rise by up to 200%. The lost wheat production is expected to exacerbate existing global wheat shortages, caused by poor production worldwide, particularly in the US and Russia. This is likely to cause a further increase in global wheat prices. There was significant damage to infrastructure across Queensland, and an estimated 18,000 residential and commercial properties were significantly affected in Brisbane and Ipswich. Lost productivity was also significant, as Brisbane s CBD closed and work halted on commercial projects. In addition, tourism slowed as domestic and international visitors cancelled or changed trips. From April 2011 onward, the floods will provide a boost to economic growth through rebuilding, which is expected to last until 2012-13 and total $10 billion. The construction sector will boom as damaged infrastructure and property is repaired, including roads, rail, bridges, ferries, houses, businesses, energy and sewerage networks. Retail stores will experience increased demand as durable www.ibisworld.com.au (03) 9655 3881 info@ibisworld.com

www.ibisworld.com.au Special Report January 2011 2 From April onward, the floods will provide a boost to economic growth through rebuilding, which is expected to last until 2012-13 goods damaged in the floods are replaced. Agriculture is also expected to benefit in the long run from increased soil moisture. All levels of government have pledged support for the recovery. The Federal Government has begun distributing emergency assistance grants of up to $1,000 per person, which should begin to have an immediate stimulatory effect. The Federal Government is responsible for funding 75% of repairs and rebuilding. However, the Federal Government has maintained its pledge to return the budget to surplus by 2012-13, which means that other budget savings must be found. Queensland Government will be responsible for 25% of rebuilding. This will place pressure on the state s budget, as revenue decreases through March, due to lost production. The recent $14 billion in asset sales will help to alleviate some pressure and Standard & Poor s indicated at the beginning of the flooding that the state government s credit rating is not likely to be affected. The floods are also likely to result in upward pressure on inflation and interest rates. Rising food prices are forecast to add up to 0.8 percentage points to the Consumer Price Index, which would fuel inflation higher than the 2% to 3% target range in the short term. However, the Reserve Bank of Australia is unlikely to increase interest rates on this basis unless higher food prices are sustained. A greater inflationary risk in the medium term is the reconstruction. Unemployment fell to 5% in December 2010, which is generally the point where further falls in unemployment will generate accelerating wage inflation. IBISWorld forecasts that unemployment will fall to 4.7% by the end of 2010-11 and 4.5% by the end of 2011-12. The reconstruction is expected to exacerbate already strong demand for construction workers and engineers, generated by an intensifying mining investment boom. With limited spare capacity in the economy, the rebuilding is expected to further accelerate wages growth leading to wider inflationary pressures and, consequently, upward pressure on interest rates. Some offsetting Revenue by sector 2009-10 2010-11 2011-12 Construction Revenue ($ billion) 273.54 295.00 311.00 Growth (%) 2.1 7.8 5.4 Tourism Revenue ($ billion) 82.31 83.61 85.72 Growth (%) -1.1 1.6 2.5 Transport Revenue ($ billion) 117.25 116.38 121.64 Growth (%) 0.5-0.7 4.5 Mining Revenue ($ billion) 148.7 186.1 193.2 Growth (%) -15.0 25.2 3.8 Agriculture Revenue ($ billion) 51.69 53.33 52.62 Growth (%) -0.9 3.2-1.6

www.ibisworld.com.au Special Report January 2011 3 The floods are expected to strip $2.5 billion from the earnings of the Australian mining sector in 2010-11 downward pressure on interest rates is expected due to the strong Australian dollar and interest rate rises in 2010, which are likely to subdue the retail, manufacturing and tourism sectors. IBISWorld expects the cash rate to finish the 2011 calendar year at 5.5%. Mining The Queensland floods are expected to take a heavy toll on the mining sector, with sector revenue forecast to be $2.5 billion weaker as a result. The floods have severely affected the coal mining industry, with most major miners in the affected area declaring full or partial force majeure on coal contracts, as the weather forced them to halt production and disrupted vital rail and port infrastructure. This has forced ports to run down coal stockpiles, creating an export shortfall of over 1 million tonnes per week. More than 15 million tonnes of coal that would otherwise have shipped have been lost since the floods began in December. IBISWorld expects lost coal shipments to total $2 billion by the end of 2010-11. With Queensland supplying about 60% of the world s coking coal exports, the floods are expected to propel coking coal spot prices to US$350 to US$400 per tonne, levels not seen since before the financial crisis. Thermal coal prices have also risen sharply since the onset of the floods and are expected to test their 2008 highs. In addition to the US-based companies that are scrambling to fill the shortfall in global coal markets, this shortage should benefit NSW-based coal producers like Gloucester Coal and Coal & Allied. The industry could take months to recover from the deluge, with production unable to restart until flood waters are drained from mine pits and roads; damage to infrastructure is repaired; and rail and port access points are restored. Miners are also expected to be hampered by environmental regulations on water discharges from mine pits and legal issues arising from declaring force majeure on contracts and failing to adhere to strict health and safety standards. In addition to the coal industry, the floods have also affected the Mining Services industry. Mine closures, production halts and disruptions to roads and railways are expected to flow through to mining contractors like Leighton Holdings, Downer EDI and Macmahon Holdings, threatening hundreds of millions of dollars in revenue. The floods have affected the Oil and Gas Production industry, with coal seam gas drilling halted in the Surat basin. They have also affected other mining industries in the state, with some aluminium and bauxite mines being forced to halt production. With the floods expected to strip $2.5 billion from the earnings of the Australian mining sector this financial year, IBISWorld estimates the sector will generate $186.1 billion in 2010-11. Agriculture The recent heavy rainfall and flooding in Queensland will devastate the Australian agriculture sector this year, causing losses of up to $1.6 billion. The recent deluge has caused widespread damage across many agriculture industries including food, crops and livestock. Major problems for these sectors include crop loss, rain damage, waterlogging, quality downgrades, delays or disruptions to harvests, and transport problems due to flooded fields, roads and damaged infrastructure. IBISWorld expects the worst affected sectors within Australian agriculture to include the following. Fruit and vegetables The Queensland horticulture industry is a crucial link in Australia s food chain. Queensland supplies 28% of Australia s fruit and vegetables, making it the leading producer of fresh produce in the country. The recent flooding threatens to reduce Australia s supply of fresh fruit and vegetables, given that 14% of the nation s produce is sourced from many floodaffected areas. It is believed that the flooding and consistent rainfall across Queensland s food-producing regions has resulted in widespread loss, damage and disrupted

www.ibisworld.com.au Special Report January 2011 4 harvests for fruit and vegetables like pumpkins, tomatoes, capsicum, celery, avocados, lettuce, zucchini, broccoli, certain types of potatoes, mangos bananas, melons, tropical fruit, grapes and seedless watermelon. All these factors combined suggest that industry revenue for Australia s fruit and vegetable growers is likely to decline by 10% overall for 2010-11, representing a combined loss of approximately $561 million. Cotton With Queensland accounting for nearly half of Australia s cotton production, Australia stands to lose a considerable portion of the national harvest this year due to the devastating floods. IBISWorld forecasts losses ranging between 300,000 and 500,000 bales, which means an overall decline for Australia s entire cotton crop for 2010-11 is likely to be damaged or written off due to flooding. As a leading cotton exporter, the expected fall in Australia s cotton crop has deepened concern over tightening cotton supplies on the world market. In turn, this has caused further spikes in global cotton prices, which soared in 2010 as global production fell due to adverse weather across the US and China, and flooding in Pakistan. As such, IBISWorld is expecting a 17% contraction for Australia s cotton industry with revenue likely to fall by over $200 million. On a positive note, improved production across New South Wales is likely to help compensate for the drop in Queensland cotton production. Moreover, cotton growers are expected to benefit from greater water availability in the short term, with the recent replenishment of irrigation dams and improved soil moisture content. Sugar Australia is a leading exporter of sugar on the global market, and Queensland sugarcane growers produce 95% of the country s annual sugar crop. This is one of the worst affected agriculture industries, and IBISWorld expects a 27% decline in revenue for sugarcane farmers. Sugarcane fields are now waterlogged in some areas, thereby preventing this year s sugarcane harvest for many growers. As a result of these declines, leading exporter Queensland Sugar Limited has already started purchasing sugar from Brazil and Thailand to supplement the fall in Australian production. This also means that many Australian growers have not been able to capitalise on rising sugar prices that recently hit a 30-year high. Looking ahead, it is likely that rain damage to many fields will also destroy a considerable portion of Australia s crop in 2011-12. Grains IBISWorld research indicates that the impact of the Queensland floods is likely to reach $400 million for the grain industry. This will have a limited effect on industry revenue as a whole, given that the Queensland grain crop accounts for only 10% of national grain production in Australia. According to Queensland s peak Agricultural revenue losses, 2010-11 Industry Lost revenue ($ million) 2010-11 (% change) 2011-12 (% change) Vegetable Growing 271.6-8.3% -2.0% Citrus, Banana and Other Fruit Growing 289.7-11.8% -1.0% Grain Growing 400.0-4.8% -1.0% Sugarcane Growing 400.0-26.6% -4.9% Cotton Growing 257.0-17.1% -10.0%

www.ibisworld.com.au Special Report January 2011 5 agricultural body AgForce, the recent deluge has hit all of Queensland s broadacre crop-growing areas with some parts of southern Queensland virtually written off before harvest. Analysts are expecting grain losses of up to 500,000 tonnes, including wheat, barley and sorghum. The biggest problem for grain agriculture exporters has been shipment delays due to the closure of critical ports, such as those in Brisbane, due to flood risk and damage. This means grain farmers fortunate enough to complete their harvest before the worst of the recent deluge are currently unable to capitalise on the current spike in global grain prices. On the bright side, there is a possibility that farmers may be able to re-plant crops if weather conditions improve, thus recouping some of their current losses. Livestock IBISWorld expects a mixed impact on the meat and livestock sector, with some farmers managing to move livestock from flood-affected areas before flooding. However, the true extent of the effect is yet to be felt, with farmers likely to return to farms over the next week. Moreover, news reports do confirm some livestock being washed away and some being isolated as a result of the floods. Finally, transporting livestock to slaughter houses seems to be the most imminent problem for farmers, given flooded roads and damage to transport infrastructure. IBISWorld expects that this will put further strain on the supply of livestock for slaughter given that farmers across the country are currently restocking herds, thanks to improved rainfall and weather conditions in 2010. Thus, lower slaughter figures due to transport problems in flood-affected areas could ultimately flow on to higher meat prices later this year. Construction The urgency of rebuilding a sodden Queensland, coupled with the willingness of Federal and state governments to offer any assistance necessary, indicates that despite a brief lapse in activity in Brisbane and southern Queensland, the construction sector is likely to experience a mini boom as a result of the recent floods. Construction will be temporarily halted in much of the state (and some other flood-affected regions of Australia) as roads become impassable and as construction equipment gets bogged down in saturated earth. Work has stopped on an estimated $5 billion worth of contracts, but much of this will resume once the water has cleared. In fact, in these regions construction tends to be muted as a result of ordinary rains in January and February. The long-term implications are less severe. The cost of replacing destroyed infrastructure, restoring power lines, rebuilding roads and bridges, and reinforcing buildings whose foundations were weakened by prolonged submersion will lead to an expected $10 billion boost in construction spending over the coming 30 months. Construction revenue Year Original forecast ($ billion) Revised forecast ($ billion) Annualised change (%) 2010-11 293.78 295.00 3.6 2011-12 306.71 311.00 5.4 2012-13 319.28 325.00 4.5 2013-14 330.68 330.68 1.7 2014-15 343.25 343.25 3.8 2015-16 357.49 357.49 4.2 2016-17 371.44 371.44 3.9

www.ibisworld.com.au Special Report January 2011 6 About 15,000 properties have been affected by significant flooding, with 5,000 businesses affected. In Ipswich a further 3,000 homes and businesses have been flooded. The Local Government Association of Queensland estimates that 70,000 to 90,000 km of council roads have been damaged (councils are responsible for 80% of roads). There has also been flood damage to rail lines and public transport the extent of which is not yet known. Estimates currently indicate that QR National will miss its original profit target by $80 million due to damage and the shutdown of coal mines. There has also been significant damage to the Queensland sewer system. Initial work will involve the clean-up and demolition of existing buildings and infrastructure. This is set to be completed in the first half of 2011. Likewise, activity will begin immediately on the reconnection of utilities, notably electrical, gas and water infrastructure. Meanwhile, small-scale repair and maintenance to existing transport infrastructure (roads, bridges, ports, rail) will be completed by the end of September. Road works in particular are a priority and will comprise the bulk of construction spending. Many roads, having been submerged for days, cannot be merely re-laid, but must be torn up and rebuilt at significant extra cost. Because demolition work must be completed before rebuilding can commence, this will be delayed compared with smaller-scale road repairs. The housing sector is also primed to benefit. Total new construction of housing as a result of the floods is set to be about 15,000 homes, valued at $4 billion over the two years through June 2013 a boost to Australia s total housing construction of 5% per annum. More specifically, this will represent a 40% increase in the Queensland market. IBISWorld also expects approximately $1 billion to $2 billion in additional spending on commercial and institutional premises over two years. The damage to these buildings was partly contained by greater use of concrete and steel, as distinct from the timber and plasterboard of most residential housing. Insurance In Australia, general insurers underwrite insurance policies to protect individuals and businesses from losses to property, houses and cars due to an insured event (e.g. flood). The number of claims customers make and the claims total dollar value can be quite volatile from year to year, as these figures depend on the frequency and severity of catastrophes. Because some natural disasters are more likely to occur within certain geographic regions of Australia, insurance underwriters use reinsurers as a means of spreading that risk. This is done to minimise insurers total exposure if the insured event occurs, by passing the risk on to reinsurers that do not have exposure to such risks in their portfolio. Thus, to cap their liability, Australian insurers have ceded a large part of the flood insurance cover to major global reinsurers such as Swiss Re, Munich Re, General Re and Lloyd s of London. Reflecting this, the major providers of insurance to Queensland flood victims Suncorp and IAG have much of their exposure reinsured. This is because floods are a frequently recurring event in Queensland during this time of year, which insurers have adequately shielded themselves against by capping their liability. In addition to this, more than half of the riskiest customers residing in Queensland have been denied flood insurance coverage because they live in areas that are considered to be too risky for insurers to cover for this type of event. Thus, many people who were affected by the floods will have no insurance policy in place. As far as coverage is concerned, Suncorp estimates that the cost to them from benefits paid out to customers claiming for damages as a result of the latest flooding in south-east Queensland will be limited to $70 million to $90 million. The company estimates that its payouts from December s inland flooding will total between $130 million and $150 million. IAG has estimated exposure of $10 million to $30 million

www.ibisworld.com.au Special Report January 2011 7 for December s inland flooding. The company has yet to put a number on the latest south-east Queensland floods, but they have stated that their exposure is limited to $150 million, with claims beyond that covered by reinsurance. All up, IBISWorld expects general insurers to pay out about $500 million in claims related to the floods. General insurers are, however, likely to face higher reinsurance costs as a result of their bloated claims this year, cutting into their bottom lines. Insurance claims Year Payouts ($ billion) Growth (%) 2009-10 24.78 N/A 2010-11 25.10 1.3% 2011-12 24.83-1.1% Transport The transport sector is likely to lose $467.4 million in January 2011, due to the floods. This could more than double, depending on the extent of the damage and how long it takes to get back to normal production levels in both the agriculture and mining sectors. Queensland s middle coast region is a major supplier of coal; in particular the state provides 60% of global coking coal exports. The majority of this coal is exported through the Port of Gladstone and the Dalrymple Bay Coal Terminal, near Mackay, QLD. The Port of Gladstone is one of Australia s largest ports, with Gladstone Ports Corporation having earned $337.9 million in 2009-10. Although the Port of Gladstone remains open, it is operating well below capacity as it is rapidly depleting its stockpile of coal. Dalrymple Bay Coal Terminal is also operating with the Goonyella rail network supplying coal but at only 70% of capacity. The second largest port in Queensland is the Port of Brisbane container throughput, now representing over 19% of the east coast container market. The extremely high water in the Brisbane River has resulted in the port being closed, which is likely to lead to a shortage of consumer goods. The Caltex refinery in Brisbane has been closed for a week due to the rains and will not return to full capacity until the port reopens. If fuel needs to be transported overland for other capital cities, Australia s fuel prices are likely to rise. Nearly 10% of the world s coalcarrying ships serve the Queensland coal industry, and the delay in reloading and the potential of port shutdowns will have a major impact on shipping companies. Currently, more than 100 ships are waiting to be loaded with coal, with port operators forecasting a turnaround of 22 days. As a result of so many ships lying idle, shipping rates have fallen dramatically to just $10,000 per day the lowest level since February 2009, and well below October s recent high of $46,284 per day. Rail operators are also being heavily affected by the floods. The recently floated QR National is the worst-affected railway, with several lines closed or under water. The Blackwater network was flooded, and lines in Toowoomba and the Lockyer Valley are also closed. Damage and a derailment on the Moura coal line resulted in the line s closure until 13 January. It is unclear how much damage has been caused to tracks, but the repair bill could be over $ 1 billion. The highways have also been blocked or washed away by the rising water. The Queensland trucking industry was worth $7.0 billion, with $213.6 million being lost due to the floods. Goods that would normally be trucked in to Rockhampton are being barged down the coast from Mackay. Despite the floods, annual Transport revenue losses, 2010-11 Industry or sector Lost revenue ($ million) Overall transport sector 467.4 Road 213.6 Rail 26.0 Ports 37.4 International shipping 5.0

www.ibisworld.com.au Special Report January 2011 8 Subscribe and become an industry expert Subscription packages can be tailored to meet your individual or company s needs. Benefits of subscription include substantial discounts on report prices, exclusive data access and rates on customised research to help you move quicker than the competition. Including key statistics, analysis, historical data and future forecasts, IBISWorld Industry Reports provide the information you need to make sound business decisions now and into the future. revenue for the industry is expected to increase, as tonnes of materials needed for reconstruction will be transported across the state. Tourism The floods represent a major additional piece of bad news for the tourism industry, which is already struggling due to the strong Australian dollar. With footage of Queensland under water being beamed to viewers around the world, tourism agents and operators have experienced an instant spate of cancellations. The recent heavy rain has not caused major flooding in northern Queensland, but the run-off of large volumes of fresh water and sediment onto the Great Barrier Reef is a threat to the health of the coral and the clarity of the water for scuba diving tours. IBISWorld estimates that revenue for the tourism industry in 2010-11 was to have been $84.20 billion, with the floods likely to cut this by 0.7%, or $590 million, to $83.61 billion. While cancellations are already coming in from international visitors, the domestic tourism industry will be less affected. Queensland accounts for about a quarter of Australia s total visitor nights, but any visitors lost to the flood-affected areas in the short term are likely to holiday elsewhere in Australia, which is effectively neutral for the national figure. While tourism infrastructure in key tourism areas of Queensland, such as Cairns, the Whitsundays, and the Gold Coast, has been largely unaffected, there exists a public relations challenge for tourism boards and individual operators to communicate that they re still open for business and are safe to visit. While some tourists will visit floodaffected areas in the coming months, as a gesture of solidarity to beleaguered local operators, the big picture remains that the tourism industry will lose a lot more than it will gain from this natural disaster. It is expected that the industry will rebound in 2011-12, as stories of the flooding fade in the minds of prospective visitors, and as the clean-up effort restores much of the flood-affected area to its previous condition. The impact of Oprah Winfrey s visit to Australia, and subsequent broadcasts across the world, is very timely for the Australian tourism industry, enabling footage of Australia at its best to also be seen on the television screens of foreigners who have witnessed reports of the flood. Total tourist nights (domestic and international visitors) 11% WA 6% SA 2% TAS 2% 2% ACT NT 32% NSW For more information, please call us today on: (03) 9655 3881 20% VIC 25% QLD SOURCE: WWW.IBISWORLD.COM.AU

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