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At the height of the resource boom, inadequate coastal infrastructure is leading to lengthy—and costly—shipping delays


SYDNEY: Australia's resource sector and state governments had an unexpected opportunity to aggressively develop the country's infrastructure in the export lull that accompanied the global financial crisis.

With the absence of heavy export volumes, they could have worked to unclog the bottlenecks that caused delays and sapped profits at the height of the resource boom in 2007. But neither stepped up and little progress has been made to prevent a repeat of the congestion that stymied shipments to paying customers.

Australian iron ore and coal exports rose to record levels in the final three months of 2009, with iron ore exports surpassing 98 million tonnes and coal exports rising above 74 million tonnes on strong demand from China, South Korea and Japan, according to the Australian Bureau of Agricultural and Resource Economics.

Yet even with such high volumes of dry bulk material headed for the export market, little has been done to prevent a jam. "The government has been slow to provide infrastructure like ports and rail, but it is going to be a limiting factor on how much more exporting capacity Australia has for the world and for China," Ord Minnett analyst Peter Arden said.

At the height of Australia's resource boom, the lack of adequate coastal infrastructure resulted in shipment delays and skyrocketing late costs. On Australia's coal-rich east coast, miners like BHP Billiton, Centennial Coal Co. Ltd., Rio Tinto and Xstrata Plc struggled with delays as growing numbers of freight and commuter trains shared the same rail lines.

"In Queensland, some parts of the rail system don't have enough passing loops installed. When you have a single-track line you need to have parts that are double tracked so one train can wait while another passes," said Paul Young, commodities analyst at Deutsche Bank in Australia. This meant inland coal shipments ran late to Newcastle, the regional coal export hub, leaving cargo vessels no choice but to line up to await loading.

The problem reached epic proportions in March 2007, when a record 70 vessels were lined up for as long as 22 days to pick up cargo. "You've got to book ships six months in advance and it's tough to change that," Young said. "If the rail doesn't respond, or there's a lag in the system, the ship just has to wait."

Demurrage costs, fees shipping lines charge shippers for delays beyond the scheduled departure time, reportedly ran into the millions of dollars for Xstrata as the company unsuccessfully tried to declare force majeure at Newcastle. "Demurrage hurts producers and it hurts Australia, because producers are paying costs they shouldn't be. It can run into the dollars per tonne, and (A)$5 ($4.60) per tonne can easily encroach on a company's bottom line," Young said.

The railway troubles on Australia's west coast is epitomized by Fortescue Metals Group Ltd.'s fight for third-party access to dedicated rail lines owned by competitors BHP Billiton and Rio Tinto. Both have been embroiled in a decade-long court battle to prevent newcomer Fortescue from accessing their private rail infrastructure, built thanks to government land grants over 40 years ago.

Australia's iron ore-rich west coast also struggles with port congestion. Port Headland, which handles the bulk of BHP's and Rio's Pilbara iron ore traffic, has a limit constraint of 380 million tonnes per year. "It can't be expanded past that. It's running at about 200 million tonnes, and BHP is expanding its shipments from 130 million tonnes to 240 million tonnes," Young said.

As iron ore shipments from the region increased over the last two months, so did shipment delays, which recently rose to 12 days from the usual one to five days. "Fortescue is the big loser. They've been telling the market they will go to 150 million tons, but they can't go beyond 125 million tons," Young noted.

But while mining companies openly complain about inadequate infrastructure, few are prepared to put up their own funds for upgrades. "When you develop a mining project you have to develop the infrastructure, but we seem to have gotten away from that to expecting someone else to build it," Arden said.

The slow global economic recovery has presented a window of opportunity for Australia's infrastructure networks to catch up to the volumes demanded by the resource industry's export-heavy dynamics.

On the east coast, the Queensland state government is finally bowing out of the race and offering its railway network for sale. However, meaningful upgrades won't come in time. The sales process will take months, and subsequent work on the lines won't start immediately, providing little relief for ships scheduled to pick up coal at Newcastle this year. In the week ended March 8, there were 46 vessels queuing up at Newcastle, with coal vessels waiting an average of 15.6 days compared with just half a day for non-coal ships.

In Western Australia, the state government has approved plans by Fortescue and Aquila Resources Ltd. to build a A$1-billion port facility at Anketell designed to handle 350 million tonnes of iron ore to relieve some of the congestion at nearby Port Headland. "This will be a deep-sea port—in fact, the first deep-sea port developed in the Pilbara for 30 years," Western Australian Premier Colin Barnett told a press conference. While current iron ore exports from the state stand at 380 million tonnes, "by 2015 total production will be somewhere in the range of 600 million to 700 million tonnes," he added. However, the project will be years in the making, with little detail as to the overall cost or who will foot it.

Some miners are taking the issue into their own hands. Billionaire mining entrepreneur Gina Rinehart has announced plans for a A$2.2-billion ($2.03 billion) private railway linking the Galilee Basin to a port at Abbott Point as she moves ahead with plans to develop new coal mines in the area. But Rinehart is alone in an otherwise level field content to let a unique opportunity slip by.

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