Risk linkages

The role of climate change in the recent catalogue of meteorological disasters will be hotly debated. It is widely acknowledged that a warming world will impact cyclone activity and rainfall patterns. However, the impact on the intensity of La Niña events remains uncertain.

Event

The 2010/2011 La Niña episode has left a human toll in its wake and pushed global commodity prices up. Raw sugar prices have reached 36.08 US cents a pound in the first week of February 2011. This is the highest prices in 30 years. Even conservative analysts are forecasting a 30% increase on thermal coal prices for 2011-12 contracts relative to 2010-2011 settlements. The direct brunt of the current La Niña episode has been born by the Australian economy. Australia's role as a major exporter of key commodities has been bought sharply into focus as adverse conditions reverberate across the commodity markets.

Significance

La Niña is a natural three to six year cycle where sea surface temperatures are lower than normal across the central and eastern Pacific Ocean. Conversely sea surface temperatures on the western side of the Pacific are warmer. The knock-on impacts of these sea-surface temperatures then distort ‘normal' atmospheric conditions.

The recent flooding in Australia, Malaysia and the Philippines are all associated with strong La Niña conditions. The strength of the current episode has resulted in two to three degree Celsius sea surface temperature anomalies off eastern Australia. This contrast in air pressure causes more rainfall. Those same unusually warm waters helped account for the intensity of Cyclone Yasi which made landfall in Queensland on 3rd February. At least 114 people have died in recent flooding events across Australia, the Philippines and Malaysia. As the most developed economy in the region, Australia has borne the majority of the cost.

The financial impact of recent events for Australia has yet to be fully quantified; but the last La Niña of comparable strength in 1974 was associated with record flooding in Brisbane and Cyclone Tracy. The latter destroyed the city of Darwin and, according to today's prices, would have direct costs of nearly AUD$4bn (approximately US$4bn). However an exact re-occurrence of Cyclone Tracy would have an even greater economic toll - since 1974 Darwin's population has grown by 250%.

Early estimates by the Australian treasurer, Wayne Swan, warn that the Australian economy could contract for the first time since the global economic crisis. In October 2010, prior to the recent natural disasters,the IMF projected that Australia's real GDP would expand by3.5% in 2011.

Disruption to Queensland's coal and agricultural exports is thought to have cost AUD$7bn. Even before the arrival of Cyclone Yasi, the government sought to introduce a politically unpopular flood levy to raise funds towards an estimated bill of AUD$5.6bn due to damage. Australians will feel the cost of La Niña starkly throughout 2011.

The worldwide wrath of the ‘little girl'

Australia is a key global supplier to the world commodity and energy markets. The country's importance to global commodity markets coupled with its vulnerability to climatic extremes makes it uniquely exposed. Australia is the world's leading coal exporter and some Australian financial analysts suggest supply disruption could drive thermal coal as high as US$145 a tonne for 2011-12 contracts, well above the US$98 a tonne paid for 2010-2011. Thermal coal fires power stations across the world and is the major source of electricity in Asia. Arise in energy prices will be felt globally.

As Cyclone Yasi approached Australia, sugar prices in New York reached a 30 year high on 2nd February. Australia is the third largest exporter of sugar and a third of that supply was in the path of Cyclone Yasi. Some 27% of the Australian cotton crop has been damaged by recent weather events.

Such crop failures compound the impact of earlier crop losses from floods in Pakistan and China in 2010, and have pushed cotton prices to a 150 year high. The approach of Cyclone Yasi and the closure of north Queensland's mines placed upward pressure on the price of copper and tin. Both hit record high prices late last week with copper trading at US$9810 a tonne and tin at US$30,400 a tonne.

La Niña episodes in Australia are well known to cause flooding and increased cyclone activity. The extractive and agricultural industries have fuelled the Australian economy for decades and have shielded the country from the worst of the global economic downturn. Unfortunately the concentration of the country's extractive industries in the cyclone prone Western Australia, Northern Territory and Queensland, and the rich agricultural land in the flood prone eastern seaboard, make economic output particularly vulnerable to La Niña episodes. Recent events demonstrate that even if business operations are not directly impacted, the disruption to infrastructure will have direct consequence on export markets, escalating costs until business as usual prevails.

Forecast

Meteorologists believe that this La Niña episode has peaked. This means that the chances of a cyclone as intense as Yasi will be somewhat reduced. Yet, the threat is far from over, with the Australian regional cyclone season officially running until the end of April and the La Niña episode expected to continue throughout the first quarters of 2011. With many of the global commodity markets for which Australia is a key supplier registering elevated prices, any additional supply disruptions could see further price hikes.

The role of climate change in the recent catalogue of meteorological disasters will be hotly debated. It is widely acknowledged that a warming world will impact cyclone activity and rainfall patterns. However the impact on the intensity of La Niña events remains uncertain. The effect of La Niña on the global commodity markets should not be underestimated, however. Those with supply chain interests in the western Pacific rim would do well to heed the economic warning of the 2010/11 La Niña episode. However the global community has a short memory. Only a year ago much of Australia was still officially in a decade long drought.

Helen Hodge, Environmental Analyst at Maplecroft.

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