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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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Thursday, 09 November 23
GREEK AND CHINESE COMPANIES OWN 34% OF THE GLOBAL FLEET’S CARGO CAPACITY - BIMCO
“The global fleet of cargo carrying ships consists of around 61,000 ships with a deadweight capacity of about 2,200 million tonnes. The ships ...
Monday, 23 October 23
CHINA SEPT COAL OUTPUT HITS SIX-MONTH HIGH ON RISING POWER DEMAND - REUTERS
China’s September coal output rose 0.4% from August to the highest level since March, official data showed on Wednesday, on rising power dema ...
Monday, 23 October 23
INDIA COAL INVENTORIES DROP AT FASTEST PACE IN TWO YEARS, BOOSTING IMPORTS - REUTERS
Coal inventories at Indian power plants in the first half of October fell at their fastest rate in two years, an analysis of government data showed ...
Tuesday, 19 September 23
LNG SHIPPING STOCKS: THE ASIAN GROWTH UP-INDICES
Last week, the UP World LNG Shipping Index (UPI) gained 3.81 points or 2.51%, closing at 155.85 points. This index tracks the performance of LNG sh ...
Sunday, 10 September 23
GOLDMAN SACHS PREDICTS OIL PRICE TO HIT $100 ON OPEC CUTS - YAHOO FINANCE
Oil supply cuts by Saudi Arabia and Russia could lead to Brent crude jumping as high as $107 a barrel in 2024, Goldman Sachs Commodities Research h ...
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- Gujarat Sidhee Cement - India
- McConnell Dowell - Australia
- IHS Mccloskey Coal Group - USA
- Bukit Asam (Persero) Tbk - Indonesia
- San Jose City I Power Corp, Philippines
- Australian Coal Association
- Indian Oil Corporation Limited
- Siam City Cement PLC, Thailand
- Carbofer General Trading SA - India
- Cigading International Bulk Terminal - Indonesia
- Kideco Jaya Agung - Indonesia
- Central Electricity Authority - India
- New Zealand Coal & Carbon
- Madhucon Powers Ltd - India
- Trasteel International SA, Italy
- Singapore Mercantile Exchange
- GAC Shipping (India) Pvt Ltd
- Kapuas Tunggal Persada - Indonesia
- Leighton Contractors Pty Ltd - Australia
- Kaltim Prima Coal - Indonesia
- Karaikal Port Pvt Ltd - India
- Georgia Ports Authority, United States
- TNB Fuel Sdn Bhd - Malaysia
- Thiess Contractors Indonesia
- Vedanta Resources Plc - India
- Riau Bara Harum - Indonesia
- Interocean Group of Companies - India
- Australian Commodity Traders Exchange
- The University of Queensland
- Baramulti Group, Indonesia
- Africa Commodities Group - South Africa
- Marubeni Corporation - India
- SMG Consultants - Indonesia
- Anglo American - United Kingdom
- Malabar Cements Ltd - India
- Sical Logistics Limited - India
- Star Paper Mills Limited - India
- White Energy Company Limited
- Energy Link Ltd, New Zealand
- Salva Resources Pvt Ltd - India
- Standard Chartered Bank - UAE
- Ceylon Electricity Board - Sri Lanka
- Ministry of Transport, Egypt
- Coastal Gujarat Power Limited - India
- Renaissance Capital - South Africa
- Petron Corporation, Philippines
- Meenaskhi Energy Private Limited - India
- Merrill Lynch Commodities Europe
- Karbindo Abesyapradhi - Indoneisa
- Electricity Authority, New Zealand
- Toyota Tsusho Corporation, Japan
- Gujarat Electricity Regulatory Commission - India
- Pipit Mutiara Jaya. PT, Indonesia
- Bhatia International Limited - India
- Bukit Makmur.PT - Indonesia
- Goldman Sachs - Singapore
- Altura Mining Limited, Indonesia
- Straits Asia Resources Limited - Singapore
- Sarangani Energy Corporation, Philippines
- Bukit Baiduri Energy - Indonesia
- Chettinad Cement Corporation Ltd - India
- Orica Mining Services - Indonesia
- Vizag Seaport Private Limited - India
- Indo Tambangraya Megah - Indonesia
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Commonwealth Bank - Australia
- CIMB Investment Bank - Malaysia
- Indika Energy - Indonesia
- Aboitiz Power Corporation - Philippines
- Holcim Trading Pte Ltd - Singapore
- PTC India Limited - India
- Directorate Of Revenue Intelligence - India
- Price Waterhouse Coopers - Russia
- Central Java Power - Indonesia
- Tamil Nadu electricity Board
- Lanco Infratech Ltd - India
- Latin American Coal - Colombia
- Essar Steel Hazira Ltd - India
- Bulk Trading Sa - Switzerland
- The Treasury - Australian Government
- Pendopo Energi Batubara - Indonesia
- Kepco SPC Power Corporation, Philippines
- AsiaOL BioFuels Corp., Philippines
- Kohat Cement Company Ltd. - Pakistan
- London Commodity Brokers - England
- Alfred C Toepfer International GmbH - Germany
- Global Business Power Corporation, Philippines
- Indonesian Coal Mining Association
- Semirara Mining and Power Corporation, Philippines
- Binh Thuan Hamico - Vietnam
- Power Finance Corporation Ltd., India
- GMR Energy Limited - India
- Antam Resourcindo - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Rashtriya Ispat Nigam Limited - India
- Directorate General of MIneral and Coal - Indonesia
- India Bulls Power Limited - India
- Eastern Energy - Thailand
- Billiton Holdings Pty Ltd - Australia
- Planning Commission, India
- CNBM International Corporation - China
- Orica Australia Pty. Ltd.
- Ministry of Mines - Canada
- Ambuja Cements Ltd - India
- Bharathi Cement Corporation - India
- Jorong Barutama Greston.PT - Indonesia
- Mercuria Energy - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Xindia Steels Limited - India
- Electricity Generating Authority of Thailand
- Manunggal Multi Energi - Indonesia
- Samtan Co., Ltd - South Korea
- Barasentosa Lestari - Indonesia
- Semirara Mining Corp, Philippines
- Bank of Tokyo Mitsubishi UFJ Ltd
- Thai Mozambique Logistica
- Coalindo Energy - Indonesia
- Uttam Galva Steels Limited - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Eastern Coal Council - USA
- Global Coal Blending Company Limited - Australia
- GVK Power & Infra Limited - India
- ICICI Bank Limited - India
- Neyveli Lignite Corporation Ltd, - India
- Chamber of Mines of South Africa
- Bhushan Steel Limited - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- GN Power Mariveles Coal Plant, Philippines
- Sinarmas Energy and Mining - Indonesia
- Deloitte Consulting - India
- ASAPP Information Group - India
- Tata Chemicals Ltd - India
- PowerSource Philippines DevCo
- Banpu Public Company Limited - Thailand
- Indogreen Group - Indonesia
- Kumho Petrochemical, South Korea
- Larsen & Toubro Limited - India
- Attock Cement Pakistan Limited
- European Bulk Services B.V. - Netherlands
- The State Trading Corporation of India Ltd
- Aditya Birla Group - India
- Asmin Koalindo Tuhup - Indonesia
- Meralco Power Generation, Philippines
- Parry Sugars Refinery, India
- International Coal Ventures Pvt Ltd - India
- Indian Energy Exchange, India
- VISA Power Limited - India
- Savvy Resources Ltd - HongKong
- OPG Power Generation Pvt Ltd - India
- Vijayanagar Sugar Pvt Ltd - India
- South Luzon Thermal Energy Corporation
- Cement Manufacturers Association - India
- Parliament of New Zealand
- Globalindo Alam Lestari - Indonesia
- Timah Investasi Mineral - Indoneisa
- Edison Trading Spa - Italy
- Miang Besar Coal Terminal - Indonesia
- Ind-Barath Power Infra Limited - India
- Therma Luzon, Inc, Philippines
- Global Green Power PLC Corporation, Philippines
- Posco Energy - South Korea
- Medco Energi Mining Internasional
- Independent Power Producers Association of India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Mercator Lines Limited - India
- Makarim & Taira - Indonesia
- Wood Mackenzie - Singapore
- Mjunction Services Limited - India
- Metalloyd Limited - United Kingdom
- Bangladesh Power Developement Board
- Sree Jayajothi Cements Limited - India
- Maharashtra Electricity Regulatory Commission - India
- Agrawal Coal Company - India
- Bayan Resources Tbk. - Indonesia
- Romanian Commodities Exchange
- Kalimantan Lumbung Energi - Indonesia
- Mintek Dendrill Indonesia
- Bahari Cakrawala Sebuku - Indonesia
- Port Waratah Coal Services - Australia
- Jaiprakash Power Ventures ltd
- IEA Clean Coal Centre - UK
- Kobexindo Tractors - Indoneisa
- Maheswari Brothers Coal Limited - India
- Coal and Oil Company - UAE
- Heidelberg Cement - Germany
- Energy Development Corp, Philippines
- MS Steel International - UAE
- Bhoruka Overseas - Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- Krishnapatnam Port Company Ltd. - India
- Formosa Plastics Group - Taiwan
- SMC Global Power, Philippines
- PNOC Exploration Corporation - Philippines
- SN Aboitiz Power Inc, Philippines
- Wilmar Investment Holdings
- Kartika Selabumi Mining - Indonesia
- Rio Tinto Coal - Australia
- Dalmia Cement Bharat India
- Ministry of Finance - Indonesia
- Sojitz Corporation - Japan
- Simpson Spence & Young - Indonesia
- Sindya Power Generating Company Private Ltd
- Intertek Mineral Services - Indonesia
- Sakthi Sugars Limited - India
- Jindal Steel & Power Ltd - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Grasim Industreis Ltd - India
- Oldendorff Carriers - Singapore
- Siam City Cement - Thailand
- Gujarat Mineral Development Corp Ltd - India
- Economic Council, Georgia
- LBH Netherlands Bv - Netherlands
- TeaM Sual Corporation - Philippines
- Iligan Light & Power Inc, Philippines
- Borneo Indobara - Indonesia
- Videocon Industries ltd - India
- Minerals Council of Australia
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