Miners need to embrace weather risk management

by Artemis on February 8, 2011

The recent flooding experienced in Australia has severely impacted the mining industry there and brought to light shortcomings in their risk management plans especially with regards to hedging their weather risk. According to this article on Yahoo (from Reuters) as many as 16 coal mines have declared full or partial force majeur to allow them escape from sales contracts without penalty.

Force majeur is a legal clause which allows sales and supply agreements to be broken in the event of disaster. So that’s good for the mining firms as it prevents costly legal action but it still means their cashflow is impacted by the inability to fulfill the orders and for the customer who doesn’t receive an order the same cashflow impact applies.

Insurance policies will provide some financial recompense for these unfulfilled orders but weather risk management techniques could be a better for of hedging for them particularly as they could receive payouts immediately if contracts are triggered by actual weather conditions.

Munich Re have said that weather related disasters in Australia have tripled in the last 30 years. Other reinsurers and weather market participants are consistently quoted as advising companies to ensure their risk management plans include weather and climate related actions and hedging but still these techniques are yet to be widely adopted by the large corporations who are often the most impacted.

As climate variability and weather disasters come more into focus we expect to see an increase in the uptake of weather risk management tools and techniques. Availability of weather data and also the flexibility of weather risk management products and services will have increasing influence on how industries such as mining create their disaster risk management plans in future. Re/insurers and brokers will need to be innovative in their approach to create products which work for multiple sectors and customisable contracts are sure to be an important feature as the weather risk management market evolves and matures.

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