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Australia's Floods Offer Trading Opportunities

Australia has the reputation for being a 'lucky country'. It's a term coined in irony by author Donald Horne who believed Australia was fortunate to have prosperity in spite of its leadership. However, the unprecedented flooding in central Queensland has the potential to bring its lucky streak in the past 50 years to an abrupt end.

Flood in Queensland, Australia.
Michael Dunning | Photographer's Choice | Getty Images
Flood in Queensland, Australia.

It takes years to recover from a major flood event. It destroys physical infrastructure and compromises the essential service and economic networks of businesses, and, the reality is, that most do not recover. Back in 1998, the town I was living in got flooded. It took a decade to recover, and it's now a very different town with a different economic base. This will be repeated in central Queensland, albeit on a much wider scale.

The flooded area is the world's primary producer of coking coal used in steel making, much of which is exported to China. Even before the floods, the transportation infrastructure in the region was aged and creaking as a result of decades of under investment. The disaster will severely impact coal exports and cause the price of the commodity to skyrocket.

The floods will also worsen the country's labor shortage as tradesmen, once lured to the west of Australia for mining development, are drawn back to the east coast for reconstruction. There will be upside pressure on wages, and coupled with agriculture devastation, could trigger substantial inflation.

Despite decades of mining boom, Australia has been unable to plug the gap between imports and exports and has run a constant trade deficit. Take away a large proportion of export income and the plunge into massive and unsustainable deficit will be rapid and inevitable. Australia will have to deal with the political fallout of accepting investment aid from foreign capital for rebuilding. In the current economic conditions, much of the investment capital will be sourced from China.

What will these consequences mean for trading opportunities in Australia?

Traders will begin shorting the Australian dollar and the local stock market. It could be an opportunity to trade long on selected companies in the mining export sector, but remember their profitability depends on an ability to get product to shipping ports. Investors will look to trade long in reconstruction sectors, builders and suppliers and banks.

Shorting opportunities exist in the short term with insurers. Major coal producers and infrastructure owners such as the newly listed Queensland Rail, food producers and logistics companies are also good shorting candidates.

In response to your feedback about this post: My personal support and sympathy go to all those effected by the Queensland floods. In 1998, my home and office were destroyed by flood. I subsequently represented the local council and the NT Government on several enquiries over the next 2 years into the operation of the insurance companies in flood situations. I co-chaired the Katherine flood re-construction committee and we forced concessions from insurance companies that benefited hundreds of local families. All volunteer work. We rebuilt, and I took, and still take, particular pleasure in shorting the insurance companies who sold us, and a community, short, with tricky policy covers.

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Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com. He is a regular guest on CNBC's Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.

If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. We welcome all questions, comments and requests. Guppy is now on Facebook.

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  • Daryl Guppy is an independent technical analyst who appears frequently on CNBC Asia.

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