The cost of flooding in Queensland

Stripping one percentage point from Australia's GDP might be a conservative estimate for the cost of the floods in Queensland.

Mother Nature’s new year’s gift to Australia is nothing to celebrate -- floods in Queensland that are going to cost the nation dearly.

How much, at this point, is still guesswork. But the jaw-dropping quote from Warwick McKibbin, a member of the central bank's policymaking board, in the Sydney Morning Herald on Wednesday morning was that destruction could wipe one percentage point from the nation’s economic growth.

The paper quoted him as saying: "If you look at the infrastructure damage and all the networks that have been broken, a hit to the economy of one percent is not out of the question.”

A percentage point of Australia's A$1.3 trillion ($1.28 trillion) in annual gross domestic product (GDP) is equal to around A$13 billion.

But here's the real wake-up call -- it could be much worse.

As ANZ analysts wrote in the Australia Report update yesterday: “Economists in the market now are suggesting that up to one percentage point could be stripped from GDP. We believe this is a conservative estimate.”

The analysts said their forecast is now that first quarter GDP growth could fall by 0.4%, compared to a pre-flood forecast of growth of +0.8% quarter-on-quarter. “This is mainly due to a two percentage point subtraction from growth of net exports (with coal exports to fall by 20%, approximately twice the impact of the early 2008 floods in the Bowen Basin). We have also assumed some negative impact to farm output, tourism, consumption and profits,” wrote the analysts.

Queensland – home to the Great Barrier Reef – is as much a tourism state as it is key to coal exports (it produces roughly half of the world's coking coal), plus it boasts rich farmland. Mother Nature had been generous in doling out the original goods, if you will.

Costs

The Queensland Tourism Industry Council initially estimated the floods could cost the local industry about $100 million, but now some analysts are saying this is a conservative estimate.

Last week, the agricultural industry body AgForce forecast more than A$1 billion in lost production, with the export-oriented sugar and cotton industries among the worst affected, which will have a knock-on effect on global prices of these commodities. Much of the livestock had been moved out of the flooding area and a good part of the wheat crop had been harvested, but that's little comfort to the farmers who are dealing with the floods right now.

However, it is the coal industry that may be the hardest hit, as it’s both a story of the loss of production now and the cost of fixing infrastructure. Ports and rail lines are mostly back up and running – but not yet at full capacity. Last week the Queensland Resources Council, an industry trade body, said the floods had already cost the coal industry A$1 billion in lost production. Goldman Sachs analyst Andrew Boak wrote in a research report that Queensland typically exports about $7.5 billion worth of coal every quarter, so a month of no coal exports would take out $2.5 billion, or 0.2%, from the country's annual gross domestic product. The whole industry might not be down for the count for an entire month, but on the flip side, reduced operations could drag on for several months.

The floods are also forecast to push up global coking coal prices, with some analysts forecasting $300 a tonne, compared to the $225 a tonne price in early December. And while that may help Australia offset some of the losses from reduced production, it has a knock-on effect elsewhere in the world as Queensland’s coal is frequently used to make steel. So, look out for higher costs in construction. At first blush you might think it's China that will be hard hit -- think again. The principal export destinations in Asia for Australian coking coal are Japan (around 30%), India (around 15%), China (around 10% to 15%) and South Korea (around 10%), according to steel industry experts. That means the pain will be felt across the region. Thank you Mother Nature.

For a quick snapshot of Queensland's vital statistics -- and its importance to Australia -- check out these facts, courtesy of ANZ:

* Queensland's gross state product in 2009-10 was $254.5 billion, or 19.8% of Queensland's share of the national figure

* Mining contributed 14.2% to the gross state product, and 23.6% of the Queensland contribution to the nation's figure

* Agriculture contributed 2.4% to the gross state product, and 22.4% of Queensland contribution to the nation's figure

* There are 1,143 tourism accommodation establishments in Queensland, or 26.6% of the nation's total

* Queensland's population totals 4.5 million (1.1 million are in Brisbane city), or 20.2% of the nation's overall population

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