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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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Tuesday, 19 March 13
SHIP PRICES COULD BE CLOSING IN TO REACH THEIR BOTTOM - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING NEWS
One of the latest developments in shipping asset prices has been the reluctance from shipyards to further reduce their price expectations to higher ...
Sunday, 17 March 13
A WEAK WEEK FOR SUB-BIT INDONESIA COAL SWAPS
COALspot.com - Sub-Bit Indonesia coal swaps (FOB ) for average Q2’ 2013 delivery has lost 2.11 percent and CFR South China coal shipment ...
Sunday, 17 March 13
COAL FREIGHT RATES STEADY ON HIGHER DEMAND - CAPT. REDDY
COALspot.com - This freight market continued to remain firm in all segments.
The BDI was up by 5.81 pct closing at 892 points. Cape index was up ...
Friday, 15 March 13
CHEAP SHIP VALUATIONS DON'T NECESSARILY MEAN ATTRACTIVE SAYS VESSELS VALUE - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING NEWS
With ship prices plunging by double-digits in the past few years, many ship owners are pondering their next moves in a market often described as att ...
Thursday, 14 March 13
SUPRAMAX : INDO - INDIA TRIP RATE IS AROUND $10,000; SOUTH CHINA $9500 - FEARNRESEARCH
Handy
Indian market is still quiet in respect of export of iron ore. WC India market has improved with a few stems out of the MEG, WC India opening ...
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- Sree Jayajothi Cements Limited - India
- South Luzon Thermal Energy Corporation
- Indika Energy - Indonesia
- Parry Sugars Refinery, India
- Economic Council, Georgia
- Vedanta Resources Plc - India
- Rashtriya Ispat Nigam Limited - India
- Karaikal Port Pvt Ltd - India
- Dalmia Cement Bharat India
- Cigading International Bulk Terminal - Indonesia
- Thai Mozambique Logistica
- GVK Power & Infra Limited - India
- Maheswari Brothers Coal Limited - India
- Bhoruka Overseas - Indonesia
- Manunggal Multi Energi - Indonesia
- Global Coal Blending Company Limited - Australia
- Interocean Group of Companies - India
- Kohat Cement Company Ltd. - Pakistan
- Bhatia International Limited - India
- Malabar Cements Ltd - India
- PetroVietnam Power Coal Import and Supply Company
- Billiton Holdings Pty Ltd - Australia
- Eastern Coal Council - USA
- Semirara Mining Corp, Philippines
- Intertek Mineral Services - Indonesia
- Mintek Dendrill Indonesia
- Bharathi Cement Corporation - India
- Orica Mining Services - Indonesia
- Heidelberg Cement - Germany
- Sakthi Sugars Limited - India
- Bhushan Steel Limited - India
- Vizag Seaport Private Limited - India
- Carbofer General Trading SA - India
- Bayan Resources Tbk. - Indonesia
- CIMB Investment Bank - Malaysia
- The University of Queensland
- Petrochimia International Co. Ltd.- Taiwan
- SMG Consultants - Indonesia
- Neyveli Lignite Corporation Ltd, - India
- LBH Netherlands Bv - Netherlands
- Kalimantan Lumbung Energi - Indonesia
- India Bulls Power Limited - India
- Central Electricity Authority - India
- Kapuas Tunggal Persada - Indonesia
- Commonwealth Bank - Australia
- Xindia Steels Limited - India
- Sarangani Energy Corporation, Philippines
- PTC India Limited - India
- PowerSource Philippines DevCo
- Baramulti Group, Indonesia
- Directorate Of Revenue Intelligence - India
- Siam City Cement PLC, Thailand
- Independent Power Producers Association of India
- The State Trading Corporation of India Ltd
- TeaM Sual Corporation - Philippines
- Goldman Sachs - Singapore
- Straits Asia Resources Limited - Singapore
- Tamil Nadu electricity Board
- Altura Mining Limited, Indonesia
- Antam Resourcindo - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- Australian Coal Association
- Kideco Jaya Agung - Indonesia
- Mercuria Energy - Indonesia
- PNOC Exploration Corporation - Philippines
- Planning Commission, India
- Indo Tambangraya Megah - Indonesia
- SMC Global Power, Philippines
- Banpu Public Company Limited - Thailand
- IEA Clean Coal Centre - UK
- Binh Thuan Hamico - Vietnam
- GAC Shipping (India) Pvt Ltd
- Attock Cement Pakistan Limited
- Port Waratah Coal Services - Australia
- Agrawal Coal Company - India
- Kaltim Prima Coal - Indonesia
- New Zealand Coal & Carbon
- Kobexindo Tractors - Indoneisa
- San Jose City I Power Corp, Philippines
- Eastern Energy - Thailand
- Bulk Trading Sa - Switzerland
- Romanian Commodities Exchange
- Kumho Petrochemical, South Korea
- Marubeni Corporation - India
- Electricity Authority, New Zealand
- Coal and Oil Company - UAE
- Gujarat Electricity Regulatory Commission - India
- Anglo American - United Kingdom
- Barasentosa Lestari - Indonesia
- Holcim Trading Pte Ltd - Singapore
- Simpson Spence & Young - Indonesia
- SN Aboitiz Power Inc, Philippines
- Singapore Mercantile Exchange
- Pipit Mutiara Jaya. PT, Indonesia
- Rio Tinto Coal - Australia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Medco Energi Mining Internasional
- VISA Power Limited - India
- Jaiprakash Power Ventures ltd
- Madhucon Powers Ltd - India
- Ministry of Transport, Egypt
- Toyota Tsusho Corporation, Japan
- Global Green Power PLC Corporation, Philippines
- Alfred C Toepfer International GmbH - Germany
- Siam City Cement - Thailand
- European Bulk Services B.V. - Netherlands
- Aditya Birla Group - India
- Formosa Plastics Group - Taiwan
- Mercator Lines Limited - India
- Sindya Power Generating Company Private Ltd
- Bukit Asam (Persero) Tbk - Indonesia
- Meenaskhi Energy Private Limited - India
- Thiess Contractors Indonesia
- Jindal Steel & Power Ltd - India
- Karbindo Abesyapradhi - Indoneisa
- Metalloyd Limited - United Kingdom
- Essar Steel Hazira Ltd - India
- Standard Chartered Bank - UAE
- Central Java Power - Indonesia
- Electricity Generating Authority of Thailand
- Gujarat Sidhee Cement - India
- Sinarmas Energy and Mining - Indonesia
- Samtan Co., Ltd - South Korea
- Salva Resources Pvt Ltd - India
- Bukit Baiduri Energy - Indonesia
- Kartika Selabumi Mining - Indonesia
- Iligan Light & Power Inc, Philippines
- Energy Link Ltd, New Zealand
- Miang Besar Coal Terminal - Indonesia
- Sojitz Corporation - Japan
- Wilmar Investment Holdings
- Savvy Resources Ltd - HongKong
- Wood Mackenzie - Singapore
- Cement Manufacturers Association - India
- Gujarat Mineral Development Corp Ltd - India
- Indonesian Coal Mining Association
- Edison Trading Spa - Italy
- Therma Luzon, Inc, Philippines
- Posco Energy - South Korea
- Asmin Koalindo Tuhup - Indonesia
- Jorong Barutama Greston.PT - Indonesia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Bank of Tokyo Mitsubishi UFJ Ltd
- Chamber of Mines of South Africa
- Indian Energy Exchange, India
- Bukit Makmur.PT - Indonesia
- Ministry of Mines - Canada
- Semirara Mining and Power Corporation, Philippines
- Chettinad Cement Corporation Ltd - India
- Larsen & Toubro Limited - India
- Bahari Cakrawala Sebuku - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Coalindo Energy - Indonesia
- Videocon Industries ltd - India
- Krishnapatnam Port Company Ltd. - India
- Indogreen Group - Indonesia
- Energy Development Corp, Philippines
- Tata Chemicals Ltd - India
- OPG Power Generation Pvt Ltd - India
- Australian Commodity Traders Exchange
- Riau Bara Harum - Indonesia
- Aboitiz Power Corporation - Philippines
- ASAPP Information Group - India
- ICICI Bank Limited - India
- Lanco Infratech Ltd - India
- Renaissance Capital - South Africa
- McConnell Dowell - Australia
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Ind-Barath Power Infra Limited - India
- London Commodity Brokers - England
- Uttam Galva Steels Limited - India
- Trasteel International SA, Italy
- Kepco SPC Power Corporation, Philippines
- Maharashtra Electricity Regulatory Commission - India
- AsiaOL BioFuels Corp., Philippines
- Price Waterhouse Coopers - Russia
- Ambuja Cements Ltd - India
- Mjunction Services Limited - India
- Makarim & Taira - Indonesia
- International Coal Ventures Pvt Ltd - India
- Vijayanagar Sugar Pvt Ltd - India
- Borneo Indobara - Indonesia
- Ministry of Finance - Indonesia
- Leighton Contractors Pty Ltd - Australia
- Minerals Council of Australia
- CNBM International Corporation - China
- Meralco Power Generation, Philippines
- Indian Oil Corporation Limited
- Grasim Industreis Ltd - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Georgia Ports Authority, United States
- The Treasury - Australian Government
- Merrill Lynch Commodities Europe
- Orica Australia Pty. Ltd.
- Timah Investasi Mineral - Indoneisa
- GN Power Mariveles Coal Plant, Philippines
- Global Business Power Corporation, Philippines
- Deloitte Consulting - India
- Coastal Gujarat Power Limited - India
- Power Finance Corporation Ltd., India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- TNB Fuel Sdn Bhd - Malaysia
- Oldendorff Carriers - Singapore
- IHS Mccloskey Coal Group - USA
- GMR Energy Limited - India
- Pendopo Energi Batubara - Indonesia
- Ceylon Electricity Board - Sri Lanka
- White Energy Company Limited
- Petron Corporation, Philippines
- Africa Commodities Group - South Africa
- Bangladesh Power Developement Board
- Sical Logistics Limited - India
- Globalindo Alam Lestari - Indonesia
- Latin American Coal - Colombia
- MS Steel International - UAE
- Parliament of New Zealand
- Star Paper Mills Limited - India
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