Spot coking coal prices have risen around 10 per cent in a month and look set to move sharply higher as Asia's steel mills scour the globe for new suppliers to cover production lost to Australian floods.

More than two months of torrential rains in Australia's Queensland state, the world's largest exporter of coal for steel-making, have left collieries underwater, rail lines  inoperable and coal ports running at a trickle -- if at all.

Spot prices for coking coal are at around $250 a tonne, according to coal analysts and traders, more than 10 per cent over the industry benchmark $225 a tonne free on board  Australian ports negotiated between BHP Billiton   and Japanese steelmakers for the first quarter of 2011.

Pressure to find coal elsewhere is now expected to lift  spot prices close to $300 a tonne in the next few weeks, a  level last seen when Australian collieries flooded in 2008 and  a boon to non-Australian producers like Indonesia's PT Borneo  Lumbung Energi and US-based Consol Energy.

'Fully 90 per cent of Queensland's metallurgical coal  sector is off line right now,' said Patersons Securities  sector analyst Andrew Harrington in Sydney.

Australia's 159 million tonnes of coking coal exports in  2010 accounted for nearly two thirds of global shipments,  according to preliminary government figures.

Flood waters are finally starting to recede in the key  Queensland coal producing Bowen Basin, but remained high, said  the Australian Bureau of Meteorology. Declarations of force  majeure by coal miners were yet to be lifted, with at least 60  million tonnes per year of production capacity at mines that  produce primarily coking coal affected.

Wesfarmers Ltd has already trimmed 2010/11  production guidance to between 5.8 million and 6.2 million  tonnes from 6.0-6.5 million.

'Last time around we had $100 (a tonne) coking coal go to  $300 and this looks to be a lot worse than last time,'  Harrington said.

'The rains have come much earlier and the flooding is much  bigger in scope, so the likelihood is that the disruption is  going to be longer,' Harrington said.

The jump in spot prices is expected to lead to higher  second quarter contract prices, which are based on average  daily spot prices over the previous three months.

'The market was already tight, so there's only one way  things can go,' said Grant Craighead, manager of Stock  Resource in Sydney. 'The price will get squeezed upwards and  producers will scramble for coking coal wherever they can.

Steelmakers globally are bidding up prices for US exports of high-grade coal. Coking coal is needed to produce  steel from conventional blast furnaces. US metallurgical  coal is among the world's best, analysts said.

Coal producers in Indonesia, the world's third-largest  coking coal exporter after Australia and the United States,  have also had enquiries from buyers looking for cargoes in  February to replace coal from Australia, a source at one of  the country's top coal miners said on Tuesday.

Taiwan-based China Steel's executive vice  president, Lo Ming Chung, said about 80 per cent of his  company's coking coal came from Australia, but it had now  turned to the spot market since it could not source coal from  Australia.

China Steel's costs have risen some $10 million since the  Australian floods, but it has made up all the lost supply from  the spot market and is not thinking of cutting production, he  added.

In China, Australia's supply disruptions have not yet  spilled over to the domestic market, with steel mills holding  comfortable inventory levels after having replenished supplies  in November and December, local raw materials traders said.

Beijing's energy saving campaign over the past three  months, which forced many mills to scale back output or shut  down altogether, has inadvertently conserved supplies as well.      China, the world's top steel maker, produced around 450  million tonnes of coking coal in 2010, data from Merrill Lynch  shows, and it also imported around 40 million tonnes.

If coking coal prices were to increase by 20 per cent,  global steelmakers' production costs would rise by over $30 a  tonne, according to research by Steel Market intelligence.

Brian Gamble, a coal analyst with Simmons & Co, said the  floods had created a situation where consumers of  metallurgical coal were having to reevaluate their needs for  2011.

'And it's creating pressure frankly on the whole system,'  Gamble said in a client note. 

But a Japanese steel mill executive said that coking coal  supply disruptions were not unusual in Australia at this time  of year, and that mills typically stocked more than a month's  worth of coking coal inventory to ride out any shortage.

'The last time when Australians declared force majeure in  2008, some Japanese mills turned to Canadian coal and slightly  cut production,' the executive said. 'Spot prices spiked at that time, and there were worries  that Japanese mills will not be able to buy, but eventually  the imports from other sources turned out to be small.” – Reuters