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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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Sunday, 10 September 23
CHINA AUGUST COAL IMPORTS OF 44.3 MLN T HIT RECORD - REUTERS
China, the world’s top coal consumer, imported 44.3 million metric tons of the fuel last month, customs data showed, the highest amount in an ...
Tuesday, 22 August 23
CHINA'S COAL PRODUCTION LOGS STEADY GROWTH IN JANUARY-JULY: XINHUA
China’s output of raw coal went up 3.6 percent year on year in the first seven months of this year, official data showed.
The ...
Sunday, 13 August 23
THE COMMODITIES FEED: LNG SUPPLY RISKS LINGER - ING
Energy – OPEC sees deficit over remainder of 2023
Oil prices came under some pressure yesterday with ICE Brent settling a litt ...
Wednesday, 09 August 23
COAL TRADE TO RETURN TO 2019 LEVELS - BALTIC EXCHANGE
The International Energy Agency’s mid-year Coal Market Update for 2023 brings both positive and concerning news for the global coal industry. ...
Sunday, 23 July 23
ANALYSIS-INDIA'S COAL MINING BET STUMBLES AS WARY BANKS WEIGH RISING RISKS - REUTERS
India’s drive to ramp up coal output to meet growing energy demand is faltering due to banks’ reluctance to finance newly auctioned min ...
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- Lanco Infratech Ltd - India
- Borneo Indobara - Indonesia
- Electricity Authority, New Zealand
- Manunggal Multi Energi - Indonesia
- Ministry of Mines - Canada
- Parliament of New Zealand
- India Bulls Power Limited - India
- Sojitz Corporation - Japan
- Bhoruka Overseas - Indonesia
- Riau Bara Harum - Indonesia
- Sindya Power Generating Company Private Ltd
- Vedanta Resources Plc - India
- SN Aboitiz Power Inc, Philippines
- SMC Global Power, Philippines
- Port Waratah Coal Services - Australia
- Sarangani Energy Corporation, Philippines
- Bulk Trading Sa - Switzerland
- Baramulti Group, Indonesia
- Indian Oil Corporation Limited
- Cement Manufacturers Association - India
- PowerSource Philippines DevCo
- London Commodity Brokers - England
- Tata Chemicals Ltd - India
- Meenaskhi Energy Private Limited - India
- San Jose City I Power Corp, Philippines
- Barasentosa Lestari - Indonesia
- Xindia Steels Limited - India
- Planning Commission, India
- PTC India Limited - India
- Ind-Barath Power Infra Limited - India
- CNBM International Corporation - China
- PNOC Exploration Corporation - Philippines
- Kepco SPC Power Corporation, Philippines
- Independent Power Producers Association of India
- Maheswari Brothers Coal Limited - India
- Aditya Birla Group - India
- Wilmar Investment Holdings
- Holcim Trading Pte Ltd - Singapore
- Leighton Contractors Pty Ltd - Australia
- Orica Australia Pty. Ltd.
- Sical Logistics Limited - India
- Jaiprakash Power Ventures ltd
- Marubeni Corporation - India
- Simpson Spence & Young - Indonesia
- Iligan Light & Power Inc, Philippines
- Coastal Gujarat Power Limited - India
- Pipit Mutiara Jaya. PT, Indonesia
- Makarim & Taira - Indonesia
- Goldman Sachs - Singapore
- ASAPP Information Group - India
- Bhatia International Limited - India
- Gujarat Electricity Regulatory Commission - India
- Bukit Baiduri Energy - Indonesia
- Renaissance Capital - South Africa
- GVK Power & Infra Limited - India
- Ambuja Cements Ltd - India
- The State Trading Corporation of India Ltd
- Rio Tinto Coal - Australia
- Anglo American - United Kingdom
- Larsen & Toubro Limited - India
- International Coal Ventures Pvt Ltd - India
- Bangladesh Power Developement Board
- Ministry of Finance - Indonesia
- Madhucon Powers Ltd - India
- Banpu Public Company Limited - Thailand
- Energy Development Corp, Philippines
- Vijayanagar Sugar Pvt Ltd - India
- Medco Energi Mining Internasional
- Indian Energy Exchange, India
- TeaM Sual Corporation - Philippines
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- OPG Power Generation Pvt Ltd - India
- Timah Investasi Mineral - Indoneisa
- Videocon Industries ltd - India
- Semirara Mining Corp, Philippines
- Bhushan Steel Limited - India
- McConnell Dowell - Australia
- Australian Coal Association
- Salva Resources Pvt Ltd - India
- European Bulk Services B.V. - Netherlands
- Mjunction Services Limited - India
- Interocean Group of Companies - India
- Jorong Barutama Greston.PT - Indonesia
- Rashtriya Ispat Nigam Limited - India
- Global Business Power Corporation, Philippines
- Asmin Koalindo Tuhup - Indonesia
- Meralco Power Generation, Philippines
- Global Green Power PLC Corporation, Philippines
- Bharathi Cement Corporation - India
- Grasim Industreis Ltd - India
- Gujarat Mineral Development Corp Ltd - India
- Thiess Contractors Indonesia
- Romanian Commodities Exchange
- Coalindo Energy - Indonesia
- Globalindo Alam Lestari - Indonesia
- Kideco Jaya Agung - Indonesia
- Parry Sugars Refinery, India
- Billiton Holdings Pty Ltd - Australia
- Indonesian Coal Mining Association
- Karbindo Abesyapradhi - Indoneisa
- Georgia Ports Authority, United States
- Africa Commodities Group - South Africa
- Indo Tambangraya Megah - Indonesia
- Bank of Tokyo Mitsubishi UFJ Ltd
- Chettinad Cement Corporation Ltd - India
- Dalmia Cement Bharat India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Semirara Mining and Power Corporation, Philippines
- Petron Corporation, Philippines
- Posco Energy - South Korea
- Carbofer General Trading SA - India
- Mercuria Energy - Indonesia
- Thai Mozambique Logistica
- Kumho Petrochemical, South Korea
- Petrochimia International Co. Ltd.- Taiwan
- Metalloyd Limited - United Kingdom
- TNB Fuel Sdn Bhd - Malaysia
- Bahari Cakrawala Sebuku - Indonesia
- Standard Chartered Bank - UAE
- SMG Consultants - Indonesia
- Straits Asia Resources Limited - Singapore
- Intertek Mineral Services - Indonesia
- Indogreen Group - Indonesia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- White Energy Company Limited
- Alfred C Toepfer International GmbH - Germany
- Oldendorff Carriers - Singapore
- Altura Mining Limited, Indonesia
- Kalimantan Lumbung Energi - Indonesia
- IHS Mccloskey Coal Group - USA
- Minerals Council of Australia
- AsiaOL BioFuels Corp., Philippines
- Electricity Generating Authority of Thailand
- Bayan Resources Tbk. - Indonesia
- Kohat Cement Company Ltd. - Pakistan
- Karaikal Port Pvt Ltd - India
- Uttam Galva Steels Limited - India
- Coal and Oil Company - UAE
- LBH Netherlands Bv - Netherlands
- Kartika Selabumi Mining - Indonesia
- Star Paper Mills Limited - India
- GAC Shipping (India) Pvt Ltd
- GN Power Mariveles Coal Plant, Philippines
- Pendopo Energi Batubara - Indonesia
- Jindal Steel & Power Ltd - India
- New Zealand Coal & Carbon
- Binh Thuan Hamico - Vietnam
- Sakthi Sugars Limited - India
- Formosa Plastics Group - Taiwan
- IEA Clean Coal Centre - UK
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Aboitiz Power Corporation - Philippines
- The Treasury - Australian Government
- Kobexindo Tractors - Indoneisa
- Antam Resourcindo - Indonesia
- Eastern Coal Council - USA
- Neyveli Lignite Corporation Ltd, - India
- CIMB Investment Bank - Malaysia
- Ceylon Electricity Board - Sri Lanka
- GMR Energy Limited - India
- Heidelberg Cement - Germany
- Global Coal Blending Company Limited - Australia
- Latin American Coal - Colombia
- Malabar Cements Ltd - India
- PetroVietnam Power Coal Import and Supply Company
- Commonwealth Bank - Australia
- Vizag Seaport Private Limited - India
- Eastern Energy - Thailand
- Trasteel International SA, Italy
- VISA Power Limited - India
- Directorate Of Revenue Intelligence - India
- Bukit Asam (Persero) Tbk - Indonesia
- Indika Energy - Indonesia
- Australian Commodity Traders Exchange
- Edison Trading Spa - Italy
- Directorate General of MIneral and Coal - Indonesia
- Ministry of Transport, Egypt
- Attock Cement Pakistan Limited
- Wood Mackenzie - Singapore
- South Luzon Thermal Energy Corporation
- The University of Queensland
- Miang Besar Coal Terminal - Indonesia
- Maharashtra Electricity Regulatory Commission - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Chamber of Mines of South Africa
- Sinarmas Energy and Mining - Indonesia
- Cigading International Bulk Terminal - Indonesia
- Deloitte Consulting - India
- Essar Steel Hazira Ltd - India
- Bukit Makmur.PT - Indonesia
- Price Waterhouse Coopers - Russia
- Kapuas Tunggal Persada - Indonesia
- Economic Council, Georgia
- Mintek Dendrill Indonesia
- Merrill Lynch Commodities Europe
- Energy Link Ltd, New Zealand
- Central Java Power - Indonesia
- Toyota Tsusho Corporation, Japan
- Siam City Cement PLC, Thailand
- Savvy Resources Ltd - HongKong
- ICICI Bank Limited - India
- Kaltim Prima Coal - Indonesia
- Samtan Co., Ltd - South Korea
- Mercator Lines Limited - India
- Tamil Nadu electricity Board
- Orica Mining Services - Indonesia
- Power Finance Corporation Ltd., India
- Krishnapatnam Port Company Ltd. - India
- Central Electricity Authority - India
- Siam City Cement - Thailand
- Agrawal Coal Company - India
- Gujarat Sidhee Cement - India
- Sree Jayajothi Cements Limited - India
- MS Steel International - UAE
- Singapore Mercantile Exchange
- Therma Luzon, Inc, Philippines
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