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Friday, 07 December 12
A NEW PHASE FOR AUSTRALIAN RESOURCES - A FITCH STREET INTERVIEW
 This week Matt Jamieson spoke with Andrew Colquhoun in Fitch's Asian sovereign rating team, and Vicky Melbourne, Fitch's commodity analyst based in Sydney, about the outlook for the Australian resources sector. Andrew and Vicky commented that Australia's resources sector is likely to enter a new phase based on sustainable volume growth, and that a high AUD/USD exchange rate is likely to persist with potentially negative implications for the non-resource economy. In this context Australia's large miners are likely to benefit from ongoing growth in commodity exports to China, notwithstanding lower commodity prices. Matt is Head of APAC Research in Fitch's Corporate Ratings Group.
Matt: Back in August 2012, Australia's Resources and Energy Minister made a comment to the effect that Australia's resources boom is over. Does Fitch agree with this view?
Vicky: No, we wouldn't subscribe to such a simplified view. Rather we believe the sector is entering a new and, perhaps, more sustainable growth phase focused on volumes, as opposed to the previous period of growth and investment based on high commodity prices. At the same time we believe that commodity prices are unlikely to return to previous high levels, and with mining cost inflation remaining stubbornly high, this may force the exit or consolidation of those miners with high-cost structures. This will result in a lower level of investment growth in the mining sector over the medium-to long-term, and related industries will be negatively impacted.
However, at least for the short-term, absolute investment levels are still growing. According to the Australian Bureau of Statistics's September capex survey, nominal spend in mining for 2012-13 is expected to increase 17.1% to AUD109bn which is only 3.5% lower than their estimate at the start of the year.
Matt: What will be impact of lower commodity prices and lower investment over the medium-to long-term on the Australian mining sector, and particularly for the larger players rated by Fitch?
Vicky: For the larger and more cost-efficient players, such as BHP Billiton Limited/Plc (BHP; 'A+'/Stable) and Rio Tinto Limited/Plc ( 'A-'/Stable), what they may lose in price, they are likely to make up for in terms of volume, particularly given their expansion over the past two to three years. Although these large miners have announced some curtailment to their expansion in light of China's slowdown, the potential for volume growth remains. Their free cash flow generation is also likely to increase as a result of a containment in operating costs and lower capex. Fortescue Metals Group Limited (Fortescue; 'BB+'/Negative), on the other hand, will benefit from a step-change in production volume and from becoming a lower cost iron ore producer from 2013 as its new Solomon Hub comes on line.
Matt: To what extent will the Australian economy be negatively impacted by the miners' likely reduction in investments and capital expenditure?
Vicky: Not substantially. At present, there are 87 mining industry projects committed and/or underway worth AUD268bn, with the majority of these in liquefied natural gas, and the balance in iron ore and coal. This represents a significant pipeline of investments despite the capex reductions announced by several entities. The bulk of this spending will peak in 2014 because of long lead times on projects, which means they will continue to provide a meaningful contribution to the Australian economy for at least two more years.
The main reduction in planned investments is related to uncommitted/not yet approved projects such as BHP's Olympic Dam, which now look unattractive given the current stage of the commodity cycle and the greater focus on capital allocations.
Matt: Andrew, what's your perspective on this? With China's economic growth slowing, does it not follow that Australia's resources sector is likely to face weakening demand?
Andrew: To the contrary, we think demand for Australia's resources from China will remain robust, although it is unlikely to grow as strongly in the next 10 years as it did in the previous decade. The chance of a Chinese "hard landing" in the near term appears to be diminishing and is certainly not Fitch's base case. Fitch still expects China to grow in the 7%-8% range over the next two to three years, albeit slower than the 9%-10% level achieved over 2009 to 2011. Importantly the size of China's economy is now around 40% greater than it was in 2008.
Under new leadership China will face the challenge of rebalancing its economy away from investment towards consumption. Even if the rate of China's growth in investment is not as strong as was the case historically, nonetheless a significant amount of investment still remains to occur. Its urbanisation rate is well below that of advanced countries, meaning that there is still a substantial amount of buildings and infrastructure to be built.
Matt: So Fitch actually expects demand for Australian resources to continue growing over the next two to three years?
Andrew: Yes. Chinese demand for key commodities including iron ore and coal will continue to grow in an absolute sense over the next two to three years, supported by government programmes to expand infrastructure and social housing construction. So while there may be fluctuations in China's demand for Australian resources in the short term, demand should continue growing over the long term.
Moreover, there is the rest of emerging Asia to consider. For example India took 6% of Australia's exports in 2011, well below China's 27% but up from 2% in 2001, and India is at an earlier stage of development than China.
Matt: Despite a lot of negative news on China's slowdown, and declines in commodity prices, the AUD/USD exchange rate has not significantly depreciated. What's behind this?
Andrew: It is partly a function of the continued strength in Australia's terms of trade due to still high commodity prices, and partly owing to the AUD gaining "reserve currency" status to some extent as global investors seek to diversify out of USD and EUR assets. The Australian sovereign is rated 'AAA' and the AUD is now the world's fifth-most traded currency.
Matt: These factors suggest that the AUD effective exchange rate could remain high even if commodity prices weaken, particularly if overall demand for Australia's resources remains strong. How will the rest of Australia's economy be able to cope?
Andrew: It will be a big challenge, but non-resource sectors will have to remain competitive by strengthening productivity to compete globally. The alternative, if companies cannot increase their productivity, is higher unemployment. The most likely outcome is probably a bit of both, depending on the particular industry and on government structural policies.
Matt: Vicky, a final question then. In light of Andrew's comments, outside of the resources industry what corporate sectors in Australia are most at risk to a higher effective exchange rate?
Vicky: The impact on the non-resource economy is significant, particularly on Australia's tourism industry, both local and inbound, on the country's export-reliant agriculture sector, and on its retail and manufacturing sectors. A higher cost base attributed to the strong AUD continues to negatively impact Australia's auto sector - and that is despite government subsidies. The Australian Industry Group's measure of manufacturing activity showed a ninth straight month of contraction in November as firms complained of soft demand, higher energy costs and a strong Australian dollar. Moreover, with most key industries under pressure, the negative spillover facing Australia's small-and-medium sized enterprises is significant.
Australia's retail sector and discretionary spending feed off the tourism industry, particularly in states like Queensland. The retail sector is already struggling from the proliferation of online shopping, and hence additional pressure due to a high exchange rate only compounds their difficulties. A high exchange rate also makes it more attractive for the larger supermarkets to source their own-brand foods and products from overseas as opposed to local producers, as they look to deliver on their "everyday low prices" campaigns. Finally, a weak retail sector has a knock-on effect on the commercial property sector.
Vicky Melbourne - Head of Industrials - South-East Asia & Australasia
Andrew Colquhoun - Head of APAC Sovereign Ratings, Hong Kong
Matt Jamieson - Head of APAC Research - Corporate Ratings Group, Seoul
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Tuesday, 14 November 23
CHINA'S BELT AND ROAD INITIATIVE TURNS AWAY FROM COAL - WOOD MACKENZIE
Ambitious, contentious and big spending, China’s Belt and Road Initiative (BRI) is 10 years old. In that time, China has splashed more than U ...
Friday, 10 November 23
THE COMMODITIES FEED: OIL UNDER PRESSURE - ING
Energy – Brent plummets
The oil market came under significant pressure yesterday. ICE Brent settled 4.19% lower on the day and ...
Friday, 10 November 23
COAL USE AT U.S. POWER PLANTS CONTINUES DOWNWARD SPIRAL; FULL IMPACT ON MINES TO BE FELT IN 2024 - IEEFA
This year, the use of coal by the U.S.’s power producers has been so anemic that the fuel has not achieved a 20% market share in any month so ...
Friday, 10 November 23
INDIA: NATIONAL COAL INDEX RISES 3.83 POINTS IN SEPTEMBER AMID HIGHER DEMAND - LIVEMINT
The National Coal Index (NCI) rose 3.83 points to 143.91 in September amid growing demand for coal.
The union coal ministry on Tuesd ...
Thursday, 09 November 23
WE'RE PRODUCING TOO MUCH COAL, OIL AND GAS, REPORT SAYS - WSJ
World leaders pledged in 2015 to reduce emissions in a combined effort to limit climate change.
Now they are stepping up production ...
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- Orica Mining Services - Indonesia
- VISA Power Limited - India
- Global Coal Blending Company Limited - Australia
- Maharashtra Electricity Regulatory Commission - India
- Intertek Mineral Services - Indonesia
- Sarangani Energy Corporation, Philippines
- Bukit Baiduri Energy - Indonesia
- PTC India Limited - India
- Carbofer General Trading SA - India
- Deloitte Consulting - India
- Globalindo Alam Lestari - Indonesia
- White Energy Company Limited
- Mercuria Energy - Indonesia
- Star Paper Mills Limited - India
- Port Waratah Coal Services - Australia
- Georgia Ports Authority, United States
- Manunggal Multi Energi - Indonesia
- Siam City Cement PLC, Thailand
- Videocon Industries ltd - India
- Gujarat Electricity Regulatory Commission - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Ministry of Mines - Canada
- Indo Tambangraya Megah - Indonesia
- Sakthi Sugars Limited - India
- Maheswari Brothers Coal Limited - India
- Central Java Power - Indonesia
- Medco Energi Mining Internasional
- Iligan Light & Power Inc, Philippines
- Ceylon Electricity Board - Sri Lanka
- Vedanta Resources Plc - India
- Kideco Jaya Agung - Indonesia
- Bayan Resources Tbk. - Indonesia
- Baramulti Group, Indonesia
- Jorong Barutama Greston.PT - Indonesia
- Salva Resources Pvt Ltd - India
- Aditya Birla Group - India
- Indogreen Group - Indonesia
- Power Finance Corporation Ltd., India
- Krishnapatnam Port Company Ltd. - India
- Jindal Steel & Power Ltd - India
- Sindya Power Generating Company Private Ltd
- Meralco Power Generation, Philippines
- Mjunction Services Limited - India
- Bhushan Steel Limited - India
- Merrill Lynch Commodities Europe
- CIMB Investment Bank - Malaysia
- Interocean Group of Companies - India
- SN Aboitiz Power Inc, Philippines
- SMG Consultants - Indonesia
- Economic Council, Georgia
- Billiton Holdings Pty Ltd - Australia
- Jaiprakash Power Ventures ltd
- Ministry of Finance - Indonesia
- Trasteel International SA, Italy
- International Coal Ventures Pvt Ltd - India
- Heidelberg Cement - Germany
- Attock Cement Pakistan Limited
- Oldendorff Carriers - Singapore
- Price Waterhouse Coopers - Russia
- Parliament of New Zealand
- Orica Australia Pty. Ltd.
- Madhucon Powers Ltd - India
- IEA Clean Coal Centre - UK
- Electricity Generating Authority of Thailand
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- SMC Global Power, Philippines
- Riau Bara Harum - Indonesia
- Latin American Coal - Colombia
- Binh Thuan Hamico - Vietnam
- San Jose City I Power Corp, Philippines
- AsiaOL BioFuels Corp., Philippines
- Mintek Dendrill Indonesia
- Cement Manufacturers Association - India
- Chamber of Mines of South Africa
- Indika Energy - Indonesia
- Gujarat Sidhee Cement - India
- Indian Oil Corporation Limited
- London Commodity Brokers - England
- Minerals Council of Australia
- Australian Commodity Traders Exchange
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Kaltim Prima Coal - Indonesia
- Dalmia Cement Bharat India
- The University of Queensland
- GVK Power & Infra Limited - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Eastern Coal Council - USA
- PowerSource Philippines DevCo
- Bangladesh Power Developement Board
- Semirara Mining Corp, Philippines
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Wood Mackenzie - Singapore
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Rashtriya Ispat Nigam Limited - India
- Straits Asia Resources Limited - Singapore
- MS Steel International - UAE
- Bukit Asam (Persero) Tbk - Indonesia
- Lanco Infratech Ltd - India
- Global Business Power Corporation, Philippines
- Kohat Cement Company Ltd. - Pakistan
- GN Power Mariveles Coal Plant, Philippines
- Petron Corporation, Philippines
- Ambuja Cements Ltd - India
- Electricity Authority, New Zealand
- ASAPP Information Group - India
- Makarim & Taira - Indonesia
- Simpson Spence & Young - Indonesia
- Ministry of Transport, Egypt
- Directorate General of MIneral and Coal - Indonesia
- India Bulls Power Limited - India
- Planning Commission, India
- Anglo American - United Kingdom
- Independent Power Producers Association of India
- Sinarmas Energy and Mining - Indonesia
- Neyveli Lignite Corporation Ltd, - India
- European Bulk Services B.V. - Netherlands
- Xindia Steels Limited - India
- Samtan Co., Ltd - South Korea
- Coastal Gujarat Power Limited - India
- Romanian Commodities Exchange
- Eastern Energy - Thailand
- Thiess Contractors Indonesia
- New Zealand Coal & Carbon
- CNBM International Corporation - China
- The Treasury - Australian Government
- OPG Power Generation Pvt Ltd - India
- Kumho Petrochemical, South Korea
- Commonwealth Bank - Australia
- Standard Chartered Bank - UAE
- Bukit Makmur.PT - Indonesia
- Asmin Koalindo Tuhup - Indonesia
- Coalindo Energy - Indonesia
- Tamil Nadu electricity Board
- Gujarat Mineral Development Corp Ltd - India
- Rio Tinto Coal - Australia
- The State Trading Corporation of India Ltd
- Barasentosa Lestari - Indonesia
- Pendopo Energi Batubara - Indonesia
- LBH Netherlands Bv - Netherlands
- Sojitz Corporation - Japan
- Parry Sugars Refinery, India
- Africa Commodities Group - South Africa
- PetroVietnam Power Coal Import and Supply Company
- Mercator Lines Limited - India
- Siam City Cement - Thailand
- Tata Chemicals Ltd - India
- Kartika Selabumi Mining - Indonesia
- Goldman Sachs - Singapore
- Banpu Public Company Limited - Thailand
- Edison Trading Spa - Italy
- Toyota Tsusho Corporation, Japan
- Sical Logistics Limited - India
- Therma Luzon, Inc, Philippines
- Formosa Plastics Group - Taiwan
- Kepco SPC Power Corporation, Philippines
- Holcim Trading Pte Ltd - Singapore
- Meenaskhi Energy Private Limited - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Global Green Power PLC Corporation, Philippines
- Directorate Of Revenue Intelligence - India
- Australian Coal Association
- Essar Steel Hazira Ltd - India
- Kapuas Tunggal Persada - Indonesia
- Larsen & Toubro Limited - India
- Coal and Oil Company - UAE
- Antam Resourcindo - Indonesia
- ICICI Bank Limited - India
- Indonesian Coal Mining Association
- TNB Fuel Sdn Bhd - Malaysia
- South Luzon Thermal Energy Corporation
- Bulk Trading Sa - Switzerland
- Bhoruka Overseas - Indonesia
- Uttam Galva Steels Limited - India
- Marubeni Corporation - India
- Pipit Mutiara Jaya. PT, Indonesia
- Ind-Barath Power Infra Limited - India
- Miang Besar Coal Terminal - Indonesia
- Karaikal Port Pvt Ltd - India
- Karbindo Abesyapradhi - Indoneisa
- Vizag Seaport Private Limited - India
- Aboitiz Power Corporation - Philippines
- Singapore Mercantile Exchange
- Central Electricity Authority - India
- Leighton Contractors Pty Ltd - Australia
- Semirara Mining and Power Corporation, Philippines
- Wilmar Investment Holdings
- TeaM Sual Corporation - Philippines
- Metalloyd Limited - United Kingdom
- Thai Mozambique Logistica
- IHS Mccloskey Coal Group - USA
- Renaissance Capital - South Africa
- Agrawal Coal Company - India
- Alfred C Toepfer International GmbH - Germany
- Kobexindo Tractors - Indoneisa
- Timah Investasi Mineral - Indoneisa
- Chettinad Cement Corporation Ltd - India
- Borneo Indobara - Indonesia
- GAC Shipping (India) Pvt Ltd
- GMR Energy Limited - India
- Energy Development Corp, Philippines
- Bahari Cakrawala Sebuku - Indonesia
- Grasim Industreis Ltd - India
- Altura Mining Limited, Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- Bhatia International Limited - India
- Savvy Resources Ltd - HongKong
- Kalimantan Lumbung Energi - Indonesia
- Sree Jayajothi Cements Limited - India
- McConnell Dowell - Australia
- Cigading International Bulk Terminal - Indonesia
- Indian Energy Exchange, India
- Posco Energy - South Korea
- Energy Link Ltd, New Zealand
- Bharathi Cement Corporation - India
- Petrochimia International Co. Ltd.- Taiwan
- PNOC Exploration Corporation - Philippines
- Malabar Cements Ltd - India
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