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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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Saturday, 25 March 23
COAL INDIA HAS STRONG CASE TO INCREASE PRICES, TALKS ON: CMD AGRAWAL - BUSINESS STANDARD
Coal India (CIL) Chairman and Managing Director Pramod Agrawal said on Monday there is a “strong case” for increasing coal prices, and ...
Saturday, 25 March 23
ASIAN CRUDE PALM OIL WATCH 1Q23 - FITCH RATINGS
Malaysian benchmark crude palm oil (CPO) spot prices have averaged around USD915 per tonne (t) so far in 1Q23, sharply lower than the average of ar ...
Saturday, 25 March 23
INDONESIA’S COAL EXPORT INCREASED BY 21.0% YOY TO 388.4 MLN T IN 2022 - BANCHERO COSTA
After a slow start in the first quarter, global coal trade has really picked up pace last year, and is now fully back to pre-Covid levels. In the f ...
Saturday, 25 March 23
GLOBAL LNG-ASIA SPOT PRICES SLIP AS WEAK NORTHERN DEMAND REMAINS - REUTERS
Asian spot prices of liquefied natural gas (LNG) declined this week, falling to a 21-month low, as weak demand in the northeast Asia region continu ...
Wednesday, 22 March 23
OIL PRICE FALL SPECULATIVE, TO HIT $140 BY YEAR-END -ANDURAND: REUTERS
The recent fall in oil prices due to banking jitters is speculative and oil will hit $140 a barrel by the end of the year, hedge fund manager Pierr ...
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- Leighton Contractors Pty Ltd - Australia
- Kapuas Tunggal Persada - Indonesia
- Parliament of New Zealand
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Maharashtra Electricity Regulatory Commission - India
- Sical Logistics Limited - India
- Electricity Generating Authority of Thailand
- Tamil Nadu electricity Board
- IEA Clean Coal Centre - UK
- Meenaskhi Energy Private Limited - India
- TeaM Sual Corporation - Philippines
- Edison Trading Spa - Italy
- Pipit Mutiara Jaya. PT, Indonesia
- Commonwealth Bank - Australia
- Rashtriya Ispat Nigam Limited - India
- White Energy Company Limited
- Straits Asia Resources Limited - Singapore
- Wilmar Investment Holdings
- Power Finance Corporation Ltd., India
- Maheswari Brothers Coal Limited - India
- Savvy Resources Ltd - HongKong
- Agrawal Coal Company - India
- Altura Mining Limited, Indonesia
- London Commodity Brokers - England
- Formosa Plastics Group - Taiwan
- Romanian Commodities Exchange
- Deloitte Consulting - India
- Bulk Trading Sa - Switzerland
- Kohat Cement Company Ltd. - Pakistan
- Grasim Industreis Ltd - India
- Metalloyd Limited - United Kingdom
- Standard Chartered Bank - UAE
- Simpson Spence & Young - Indonesia
- OPG Power Generation Pvt Ltd - India
- Sarangani Energy Corporation, Philippines
- Therma Luzon, Inc, Philippines
- Heidelberg Cement - Germany
- Ministry of Mines - Canada
- Bukit Makmur.PT - Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- Coal and Oil Company - UAE
- Kaltim Prima Coal - Indonesia
- Central Electricity Authority - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Binh Thuan Hamico - Vietnam
- Jindal Steel & Power Ltd - India
- ICICI Bank Limited - India
- Essar Steel Hazira Ltd - India
- Mercuria Energy - Indonesia
- Globalindo Alam Lestari - Indonesia
- Toyota Tsusho Corporation, Japan
- IHS Mccloskey Coal Group - USA
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Miang Besar Coal Terminal - Indonesia
- Chamber of Mines of South Africa
- Eastern Coal Council - USA
- Renaissance Capital - South Africa
- Chettinad Cement Corporation Ltd - India
- Ceylon Electricity Board - Sri Lanka
- Kartika Selabumi Mining - Indonesia
- Madhucon Powers Ltd - India
- Port Waratah Coal Services - Australia
- Carbofer General Trading SA - India
- Marubeni Corporation - India
- LBH Netherlands Bv - Netherlands
- Ind-Barath Power Infra Limited - India
- Global Green Power PLC Corporation, Philippines
- Georgia Ports Authority, United States
- Electricity Authority, New Zealand
- Cigading International Bulk Terminal - Indonesia
- Siam City Cement - Thailand
- Wood Mackenzie - Singapore
- Karbindo Abesyapradhi - Indoneisa
- Bhushan Steel Limited - India
- Planning Commission, India
- Riau Bara Harum - Indonesia
- GAC Shipping (India) Pvt Ltd
- Gujarat Mineral Development Corp Ltd - India
- Ministry of Transport, Egypt
- Trasteel International SA, Italy
- The State Trading Corporation of India Ltd
- Central Java Power - Indonesia
- Semirara Mining Corp, Philippines
- Kobexindo Tractors - Indoneisa
- European Bulk Services B.V. - Netherlands
- Indo Tambangraya Megah - Indonesia
- Merrill Lynch Commodities Europe
- San Jose City I Power Corp, Philippines
- Kepco SPC Power Corporation, Philippines
- Latin American Coal - Colombia
- Lanco Infratech Ltd - India
- Malabar Cements Ltd - India
- Intertek Mineral Services - Indonesia
- Semirara Mining and Power Corporation, Philippines
- Xindia Steels Limited - India
- Directorate Of Revenue Intelligence - India
- Jaiprakash Power Ventures ltd
- Singapore Mercantile Exchange
- Ambuja Cements Ltd - India
- Barasentosa Lestari - Indonesia
- SMC Global Power, Philippines
- Gujarat Sidhee Cement - India
- GN Power Mariveles Coal Plant, Philippines
- Interocean Group of Companies - India
- PTC India Limited - India
- Global Business Power Corporation, Philippines
- Karaikal Port Pvt Ltd - India
- South Luzon Thermal Energy Corporation
- Antam Resourcindo - Indonesia
- Banpu Public Company Limited - Thailand
- Australian Coal Association
- Indika Energy - Indonesia
- Meralco Power Generation, Philippines
- Manunggal Multi Energi - Indonesia
- Uttam Galva Steels Limited - India
- Larsen & Toubro Limited - India
- GMR Energy Limited - India
- Pendopo Energi Batubara - Indonesia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Asmin Koalindo Tuhup - Indonesia
- Indogreen Group - Indonesia
- Iligan Light & Power Inc, Philippines
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Mjunction Services Limited - India
- Bukit Asam (Persero) Tbk - Indonesia
- The Treasury - Australian Government
- International Coal Ventures Pvt Ltd - India
- PowerSource Philippines DevCo
- Sojitz Corporation - Japan
- The University of Queensland
- Orica Mining Services - Indonesia
- SMG Consultants - Indonesia
- Neyveli Lignite Corporation Ltd, - India
- Aboitiz Power Corporation - Philippines
- Medco Energi Mining Internasional
- Mercator Lines Limited - India
- TNB Fuel Sdn Bhd - Malaysia
- Bank of Tokyo Mitsubishi UFJ Ltd
- Kumho Petrochemical, South Korea
- Posco Energy - South Korea
- Independent Power Producers Association of India
- Bhatia International Limited - India
- Africa Commodities Group - South Africa
- Bhoruka Overseas - Indonesia
- Price Waterhouse Coopers - Russia
- Alfred C Toepfer International GmbH - Germany
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Attock Cement Pakistan Limited
- Billiton Holdings Pty Ltd - Australia
- McConnell Dowell - Australia
- Salva Resources Pvt Ltd - India
- Orica Australia Pty. Ltd.
- Energy Link Ltd, New Zealand
- GVK Power & Infra Limited - India
- PetroVietnam Power Coal Import and Supply Company
- Borneo Indobara - Indonesia
- Aditya Birla Group - India
- Gujarat Electricity Regulatory Commission - India
- MS Steel International - UAE
- Mintek Dendrill Indonesia
- Kideco Jaya Agung - Indonesia
- Goldman Sachs - Singapore
- Tata Chemicals Ltd - India
- Siam City Cement PLC, Thailand
- Coastal Gujarat Power Limited - India
- Minerals Council of Australia
- Cement Manufacturers Association - India
- Bukit Baiduri Energy - Indonesia
- CIMB Investment Bank - Malaysia
- Samtan Co., Ltd - South Korea
- Economic Council, Georgia
- Energy Development Corp, Philippines
- India Bulls Power Limited - India
- AsiaOL BioFuels Corp., Philippines
- Thiess Contractors Indonesia
- Timah Investasi Mineral - Indoneisa
- SN Aboitiz Power Inc, Philippines
- Baramulti Group, Indonesia
- Jorong Barutama Greston.PT - Indonesia
- Sree Jayajothi Cements Limited - India
- Australian Commodity Traders Exchange
- Coalindo Energy - Indonesia
- ASAPP Information Group - India
- Anglo American - United Kingdom
- Petrochimia International Co. Ltd.- Taiwan
- Bangladesh Power Developement Board
- Vizag Seaport Private Limited - India
- Parry Sugars Refinery, India
- Bayan Resources Tbk. - Indonesia
- Bharathi Cement Corporation - India
- Dalmia Cement Bharat India
- Indian Oil Corporation Limited
- Sindya Power Generating Company Private Ltd
- Global Coal Blending Company Limited - Australia
- Vedanta Resources Plc - India
- Star Paper Mills Limited - India
- Holcim Trading Pte Ltd - Singapore
- Thai Mozambique Logistica
- Videocon Industries ltd - India
- VISA Power Limited - India
- Indonesian Coal Mining Association
- PNOC Exploration Corporation - Philippines
- Makarim & Taira - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- CNBM International Corporation - China
- Krishnapatnam Port Company Ltd. - India
- Rio Tinto Coal - Australia
- Eastern Energy - Thailand
- Petron Corporation, Philippines
- New Zealand Coal & Carbon
- Kalimantan Lumbung Energi - Indonesia
- Indian Energy Exchange, India
- Bahari Cakrawala Sebuku - Indonesia
- Ministry of Finance - Indonesia
- Sinarmas Energy and Mining - Indonesia
- Oldendorff Carriers - Singapore
- Sakthi Sugars Limited - India
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