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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, 02 March 23
DRY BULK MARKET: THE WAY CHINA GOES, SO GOES THE MARKET - BIMCO
We expect demand growth within the 1.5-2.5% range in 2023, driven by China’s economic recovery. Improvements in consumer sentiment should hel ...
Thursday, 02 March 23
INDIA, CHINA DEMAND BOOST LOW-RANK THERMAL COAL PRICES IN ASIA - RUSSELL, REUTERS
Signs of stronger import demand from India have arrested the decline in price of the thermal coal grades most commonly sought by the world’s ...
Thursday, 02 March 23
INDIA CHEERS THE RETURN OF ‘KING COAL’ AS INDUSTRY SEES BUOYANT FUTURE - REUTERS
India’s coal industry celebrated the return of its major conference after a three-year pandemic hiatus by presenting a bullish view of demand ...
Wednesday, 01 March 23
GEO CONNECT ASIA RETURNS IN MARCH TO ACCELERATE THE REGION’S GEOSPATIAL AND LOCATION INTELLIGENCE CAPABILITIES
Press Release: The third edition of GCA will be held in conjunction with Digital Construction Asia and the inaugural Drones Asia – an event d ...
Wednesday, 01 March 23
THE DECLINE IN THE COAL PRICE SINCE THE BEGINNING OF THE YEAR HAS BEEN SIGNIFICANT - INTERMODAL
Last week, the front-month API2 future rose by 3.5%, but since the beginning of the year the future has fallen by 39% to $136.65/t, while the Newca ...
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- Commonwealth Bank - Australia
- Samtan Co., Ltd - South Korea
- Cement Manufacturers Association - India
- Vizag Seaport Private Limited - India
- Maharashtra Electricity Regulatory Commission - India
- Carbofer General Trading SA - India
- The Treasury - Australian Government
- Global Green Power PLC Corporation, Philippines
- Singapore Mercantile Exchange
- Global Coal Blending Company Limited - Australia
- International Coal Ventures Pvt Ltd - India
- Price Waterhouse Coopers - Russia
- Indika Energy - Indonesia
- Independent Power Producers Association of India
- Posco Energy - South Korea
- Mjunction Services Limited - India
- Neyveli Lignite Corporation Ltd, - India
- Siam City Cement - Thailand
- The University of Queensland
- Aboitiz Power Corporation - Philippines
- Marubeni Corporation - India
- Indo Tambangraya Megah - Indonesia
- Madhucon Powers Ltd - India
- Rashtriya Ispat Nigam Limited - India
- Kapuas Tunggal Persada - Indonesia
- GMR Energy Limited - India
- Interocean Group of Companies - India
- Kumho Petrochemical, South Korea
- Economic Council, Georgia
- ICICI Bank Limited - India
- San Jose City I Power Corp, Philippines
- Gujarat Mineral Development Corp Ltd - India
- TNB Fuel Sdn Bhd - Malaysia
- Uttam Galva Steels Limited - India
- PNOC Exploration Corporation - Philippines
- Power Finance Corporation Ltd., India
- Goldman Sachs - Singapore
- Sindya Power Generating Company Private Ltd
- Petron Corporation, Philippines
- Thai Mozambique Logistica
- Electricity Authority, New Zealand
- Semirara Mining and Power Corporation, Philippines
- Central Java Power - Indonesia
- Renaissance Capital - South Africa
- Indian Oil Corporation Limited
- Indonesian Coal Mining Association
- Cigading International Bulk Terminal - Indonesia
- Star Paper Mills Limited - India
- South Luzon Thermal Energy Corporation
- Sical Logistics Limited - India
- Kepco SPC Power Corporation, Philippines
- GAC Shipping (India) Pvt Ltd
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Bukit Baiduri Energy - Indonesia
- Bangladesh Power Developement Board
- Holcim Trading Pte Ltd - Singapore
- Bank of Tokyo Mitsubishi UFJ Ltd
- Gujarat Electricity Regulatory Commission - India
- Australian Commodity Traders Exchange
- Parliament of New Zealand
- Metalloyd Limited - United Kingdom
- Sakthi Sugars Limited - India
- Binh Thuan Hamico - Vietnam
- Georgia Ports Authority, United States
- Riau Bara Harum - Indonesia
- Electricity Generating Authority of Thailand
- Therma Luzon, Inc, Philippines
- Sarangani Energy Corporation, Philippines
- TeaM Sual Corporation - Philippines
- Romanian Commodities Exchange
- Kideco Jaya Agung - Indonesia
- Essar Steel Hazira Ltd - India
- Grasim Industreis Ltd - India
- Xindia Steels Limited - India
- Chamber of Mines of South Africa
- Ministry of Mines - Canada
- AsiaOL BioFuels Corp., Philippines
- Global Business Power Corporation, Philippines
- Baramulti Group, Indonesia
- Kobexindo Tractors - Indoneisa
- Bayan Resources Tbk. - Indonesia
- Banpu Public Company Limited - Thailand
- GVK Power & Infra Limited - India
- Antam Resourcindo - Indonesia
- Ministry of Finance - Indonesia
- Karbindo Abesyapradhi - Indoneisa
- Bukit Asam (Persero) Tbk - Indonesia
- Indian Energy Exchange, India
- Deloitte Consulting - India
- Leighton Contractors Pty Ltd - Australia
- Tata Chemicals Ltd - India
- Ministry of Transport, Egypt
- Bharathi Cement Corporation - India
- IEA Clean Coal Centre - UK
- Eastern Energy - Thailand
- Sree Jayajothi Cements Limited - India
- Malabar Cements Ltd - India
- Coal and Oil Company - UAE
- Mercuria Energy - Indonesia
- Formosa Plastics Group - Taiwan
- Parry Sugars Refinery, India
- CIMB Investment Bank - Malaysia
- Makarim & Taira - Indonesia
- Standard Chartered Bank - UAE
- Wood Mackenzie - Singapore
- Meenaskhi Energy Private Limited - India
- Coalindo Energy - Indonesia
- Mercator Lines Limited - India
- Siam City Cement PLC, Thailand
- Jorong Barutama Greston.PT - Indonesia
- Videocon Industries ltd - India
- LBH Netherlands Bv - Netherlands
- Alfred C Toepfer International GmbH - Germany
- VISA Power Limited - India
- Directorate General of MIneral and Coal - Indonesia
- Offshore Bulk Terminal Pte Ltd, Singapore
- OPG Power Generation Pvt Ltd - India
- Tamil Nadu electricity Board
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- The State Trading Corporation of India Ltd
- Miang Besar Coal Terminal - Indonesia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Oldendorff Carriers - Singapore
- Central Electricity Authority - India
- PTC India Limited - India
- Dalmia Cement Bharat India
- Australian Coal Association
- Wilmar Investment Holdings
- Minerals Council of Australia
- Africa Commodities Group - South Africa
- Kaltim Prima Coal - Indonesia
- Meralco Power Generation, Philippines
- White Energy Company Limited
- Kalimantan Lumbung Energi - Indonesia
- London Commodity Brokers - England
- India Bulls Power Limited - India
- Altura Mining Limited, Indonesia
- Latin American Coal - Colombia
- Ind-Barath Power Infra Limited - India
- Bahari Cakrawala Sebuku - Indonesia
- Sinarmas Energy and Mining - Indonesia
- Kohat Cement Company Ltd. - Pakistan
- Pendopo Energi Batubara - Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- Intertek Mineral Services - Indonesia
- Directorate Of Revenue Intelligence - India
- Gujarat Sidhee Cement - India
- SMG Consultants - Indonesia
- ASAPP Information Group - India
- Straits Asia Resources Limited - Singapore
- Thiess Contractors Indonesia
- Anglo American - United Kingdom
- Larsen & Toubro Limited - India
- Sojitz Corporation - Japan
- Ceylon Electricity Board - Sri Lanka
- European Bulk Services B.V. - Netherlands
- Kartika Selabumi Mining - Indonesia
- Asmin Koalindo Tuhup - Indonesia
- Toyota Tsusho Corporation, Japan
- Aditya Birla Group - India
- Planning Commission, India
- Vijayanagar Sugar Pvt Ltd - India
- Edison Trading Spa - Italy
- Agrawal Coal Company - India
- Rio Tinto Coal - Australia
- Karaikal Port Pvt Ltd - India
- Savvy Resources Ltd - HongKong
- Billiton Holdings Pty Ltd - Australia
- Indogreen Group - Indonesia
- New Zealand Coal & Carbon
- Merrill Lynch Commodities Europe
- Heidelberg Cement - Germany
- Manunggal Multi Energi - Indonesia
- Orica Mining Services - Indonesia
- Jindal Steel & Power Ltd - India
- GN Power Mariveles Coal Plant, Philippines
- Eastern Coal Council - USA
- IHS Mccloskey Coal Group - USA
- Energy Link Ltd, New Zealand
- Timah Investasi Mineral - Indoneisa
- Bhatia International Limited - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- SMC Global Power, Philippines
- PowerSource Philippines DevCo
- Chettinad Cement Corporation Ltd - India
- Simpson Spence & Young - Indonesia
- Krishnapatnam Port Company Ltd. - India
- Attock Cement Pakistan Limited
- CNBM International Corporation - China
- Barasentosa Lestari - Indonesia
- Ambuja Cements Ltd - India
- Orica Australia Pty. Ltd.
- Bhoruka Overseas - Indonesia
- McConnell Dowell - Australia
- Port Waratah Coal Services - Australia
- Bukit Makmur.PT - Indonesia
- Energy Development Corp, Philippines
- Semirara Mining Corp, Philippines
- Jaiprakash Power Ventures ltd
- Trasteel International SA, Italy
- Mintek Dendrill Indonesia
- SN Aboitiz Power Inc, Philippines
- Maheswari Brothers Coal Limited - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Bulk Trading Sa - Switzerland
- PetroVietnam Power Coal Import and Supply Company
- Borneo Indobara - Indonesia
- Coastal Gujarat Power Limited - India
- Lanco Infratech Ltd - India
- Bhushan Steel Limited - India
- Medco Energi Mining Internasional
- Vedanta Resources Plc - India
- Salva Resources Pvt Ltd - India
- Iligan Light & Power Inc, Philippines
- MS Steel International - UAE
- Globalindo Alam Lestari - Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
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