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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, 26 February 23
MAWANI AND JEDDAH CHAMBER SIGN AN AGREEMENT TO BUILD INTEGRATED LOGISTICS PARK
Press Release: The Saudi Ports Authority (Mawani) and Jeddah Chamber of Commerce and Industry have today inked an agreement to set up an integrated ...
Saturday, 25 February 23
INDONESIA IS STILL BY FAR THE TOP SUPPLIER OF COAL TO CHINA - 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, said ban ...
Wednesday, 22 February 23
MARKET INSIGHT - INTERMODAL
The short-term outlook of the global soybean market is currently pivoted by a combination of weather patterns that are affecting the harvest progre ...
Saturday, 18 February 23
OIL UNLIKELY TO BREAK ABOVE $100/BBL THIS YEAR, J.P.MORGAN SAYS –- REUTERS
Brent oil prices are unlikely to breach the $100 a barrel level this year, barring any significant geopolitical drivers, with OPEC+ potentially add ...
Saturday, 18 February 23
CHINA'S COAL PRICES FALL TO 1 YR-LOW, CLOUDING DEMAND AND IMPORT OUTLOOK - REUTERS
China’s thermal coal prices hit their lowest levels in a year this week on rising inventories as domestic mine production is recovering faste ...
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- Coastal Gujarat Power Limited - India
- Holcim Trading Pte Ltd - Singapore
- TNB Fuel Sdn Bhd - Malaysia
- Minerals Council of Australia
- MS Steel International - UAE
- Metalloyd Limited - United Kingdom
- Jindal Steel & Power Ltd - India
- Trasteel International SA, Italy
- Electricity Authority, New Zealand
- Ind-Barath Power Infra Limited - India
- Sindya Power Generating Company Private Ltd
- Singapore Mercantile Exchange
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Pendopo Energi Batubara - Indonesia
- Toyota Tsusho Corporation, Japan
- Madhucon Powers Ltd - India
- Australian Commodity Traders Exchange
- Standard Chartered Bank - UAE
- AsiaOL BioFuels Corp., Philippines
- Bank of Tokyo Mitsubishi UFJ Ltd
- Medco Energi Mining Internasional
- Oldendorff Carriers - Singapore
- The State Trading Corporation of India Ltd
- Sakthi Sugars Limited - India
- Marubeni Corporation - India
- Indika Energy - Indonesia
- Thai Mozambique Logistica
- GN Power Mariveles Coal Plant, Philippines
- Krishnapatnam Port Company Ltd. - India
- LBH Netherlands Bv - Netherlands
- PetroVietnam Power Coal Import and Supply Company
- Meenaskhi Energy Private Limited - India
- Siam City Cement - Thailand
- Gujarat Mineral Development Corp Ltd - India
- Orica Australia Pty. Ltd.
- Indogreen Group - Indonesia
- Malabar Cements Ltd - India
- Kideco Jaya Agung - Indonesia
- Aditya Birla Group - India
- Sical Logistics Limited - India
- SMG Consultants - Indonesia
- Karaikal Port Pvt Ltd - India
- Manunggal Multi Energi - Indonesia
- Riau Bara Harum - Indonesia
- Timah Investasi Mineral - Indoneisa
- Makarim & Taira - Indonesia
- Mintek Dendrill Indonesia
- Tamil Nadu electricity Board
- Energy Development Corp, Philippines
- Kobexindo Tractors - Indoneisa
- Energy Link Ltd, New Zealand
- Price Waterhouse Coopers - Russia
- Independent Power Producers Association of India
- Bhoruka Overseas - Indonesia
- Ministry of Finance - Indonesia
- Merrill Lynch Commodities Europe
- ICICI Bank Limited - India
- Pipit Mutiara Jaya. PT, Indonesia
- Heidelberg Cement - Germany
- Gujarat Sidhee Cement - India
- Agrawal Coal Company - India
- Eastern Energy - Thailand
- Essar Steel Hazira Ltd - India
- Savvy Resources Ltd - HongKong
- Billiton Holdings Pty Ltd - Australia
- SN Aboitiz Power Inc, Philippines
- Parry Sugars Refinery, India
- Central Java Power - Indonesia
- Indian Oil Corporation Limited
- Indian Energy Exchange, India
- Lanco Infratech Ltd - India
- Maheswari Brothers Coal Limited - India
- Attock Cement Pakistan Limited
- Uttam Galva Steels Limited - India
- London Commodity Brokers - England
- Sojitz Corporation - Japan
- Vizag Seaport Private Limited - India
- Cigading International Bulk Terminal - Indonesia
- Jaiprakash Power Ventures ltd
- Formosa Plastics Group - Taiwan
- Star Paper Mills Limited - India
- Wilmar Investment Holdings
- Bahari Cakrawala Sebuku - Indonesia
- GMR Energy Limited - India
- PNOC Exploration Corporation - Philippines
- Xindia Steels Limited - India
- Economic Council, Georgia
- The Treasury - Australian Government
- Coalindo Energy - Indonesia
- Sarangani Energy Corporation, Philippines
- SMC Global Power, Philippines
- Kaltim Prima Coal - Indonesia
- Bukit Asam (Persero) Tbk - Indonesia
- Interocean Group of Companies - India
- Vijayanagar Sugar Pvt Ltd - India
- Karbindo Abesyapradhi - Indoneisa
- Mercator Lines Limited - India
- Iligan Light & Power Inc, Philippines
- Anglo American - United Kingdom
- Kepco SPC Power Corporation, Philippines
- CIMB Investment Bank - Malaysia
- VISA Power Limited - India
- Directorate Of Revenue Intelligence - India
- Bhatia International Limited - India
- Georgia Ports Authority, United States
- New Zealand Coal & Carbon
- PowerSource Philippines DevCo
- Tata Chemicals Ltd - India
- Meralco Power Generation, Philippines
- Kartika Selabumi Mining - Indonesia
- Aboitiz Power Corporation - Philippines
- IHS Mccloskey Coal Group - USA
- Binh Thuan Hamico - Vietnam
- Maharashtra Electricity Regulatory Commission - India
- Ceylon Electricity Board - Sri Lanka
- Miang Besar Coal Terminal - Indonesia
- Global Coal Blending Company Limited - Australia
- Mjunction Services Limited - India
- Gujarat Electricity Regulatory Commission - India
- Simpson Spence & Young - Indonesia
- Posco Energy - South Korea
- Straits Asia Resources Limited - Singapore
- Africa Commodities Group - South Africa
- Global Business Power Corporation, Philippines
- South Luzon Thermal Energy Corporation
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Planning Commission, India
- Rio Tinto Coal - Australia
- Semirara Mining and Power Corporation, Philippines
- Bulk Trading Sa - Switzerland
- TeaM Sual Corporation - Philippines
- Directorate General of MIneral and Coal - Indonesia
- Banpu Public Company Limited - Thailand
- PTC India Limited - India
- Larsen & Toubro Limited - India
- Commonwealth Bank - Australia
- Electricity Generating Authority of Thailand
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Global Green Power PLC Corporation, Philippines
- Videocon Industries ltd - India
- India Bulls Power Limited - India
- Goldman Sachs - Singapore
- Carbofer General Trading SA - India
- Samtan Co., Ltd - South Korea
- Salva Resources Pvt Ltd - India
- Petrochimia International Co. Ltd.- Taiwan
- Borneo Indobara - Indonesia
- Wood Mackenzie - Singapore
- Kohat Cement Company Ltd. - Pakistan
- Latin American Coal - Colombia
- Kumho Petrochemical, South Korea
- Offshore Bulk Terminal Pte Ltd, Singapore
- Jorong Barutama Greston.PT - Indonesia
- Kalimantan Lumbung Energi - Indonesia
- Bharathi Cement Corporation - India
- Thiess Contractors Indonesia
- Rashtriya Ispat Nigam Limited - India
- Neyveli Lignite Corporation Ltd, - India
- Semirara Mining Corp, Philippines
- Indo Tambangraya Megah - Indonesia
- Ambuja Cements Ltd - India
- Siam City Cement PLC, Thailand
- Leighton Contractors Pty Ltd - Australia
- Power Finance Corporation Ltd., India
- Cement Manufacturers Association - India
- McConnell Dowell - Australia
- Sree Jayajothi Cements Limited - India
- Chettinad Cement Corporation Ltd - India
- Petron Corporation, Philippines
- Dalmia Cement Bharat India
- Bukit Baiduri Energy - Indonesia
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Central Electricity Authority - India
- Ministry of Transport, Egypt
- Sinarmas Energy and Mining - Indonesia
- White Energy Company Limited
- Baramulti Group, Indonesia
- ASAPP Information Group - India
- Grasim Industreis Ltd - India
- Eastern Coal Council - USA
- Bhushan Steel Limited - India
- Australian Coal Association
- Renaissance Capital - South Africa
- GAC Shipping (India) Pvt Ltd
- Bangladesh Power Developement Board
- Asmin Koalindo Tuhup - Indonesia
- Parliament of New Zealand
- Indonesian Coal Mining Association
- Port Waratah Coal Services - Australia
- Deloitte Consulting - India
- Kapuas Tunggal Persada - Indonesia
- OPG Power Generation Pvt Ltd - India
- Orica Mining Services - Indonesia
- Globalindo Alam Lestari - Indonesia
- Bayan Resources Tbk. - Indonesia
- Mercuria Energy - Indonesia
- International Coal Ventures Pvt Ltd - India
- Altura Mining Limited, Indonesia
- San Jose City I Power Corp, Philippines
- Ministry of Mines - Canada
- Vedanta Resources Plc - India
- Intertek Mineral Services - Indonesia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Coal and Oil Company - UAE
- Edison Trading Spa - Italy
- CNBM International Corporation - China
- Alfred C Toepfer International GmbH - Germany
- Chamber of Mines of South Africa
- Barasentosa Lestari - Indonesia
- The University of Queensland
- Romanian Commodities Exchange
- IEA Clean Coal Centre - UK
- Bukit Makmur.PT - Indonesia
- GVK Power & Infra Limited - India
- European Bulk Services B.V. - Netherlands
- Therma Luzon, Inc, Philippines
- Antam Resourcindo - Indonesia
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