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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, 21 February 13
SPRING COAL PROCUREMENT 2013 IS ABOUT TO TAKE PLACE
In 2012, “Steady Growth” had set the keynote for China’s economic development. Guided by the principle of progressing steadily, do ...
Wednesday, 20 February 13
BAKRIE GROUP LOOKS TO HAVE A CLEAR UPPER HAND - LUCKY ARIESANDI, CFA
The Bakrie-Rothschild saga is entering its final stage, with Bumi Plc (BUMI LN)’s holders to convene on 21 Feb at 11am GMT to vote on Nat Roth ...
Tuesday, 19 February 13
NEWCASTLE PORT SHIPPED 38.65 PERCENT LESS COAL W-O-W
COALspot.com - Newcastle port in Australia has loaded 1,820,559 MT of thermal and coking coal for week ended 0700 hours 18 February 2013, Newc ...
Monday, 18 February 13
78.75 MILLION TONS OF COAL RESERVES ARE NEWLY PROVEN IN WUGANG HUNAN PROVINCE
COALspot.com - Recently, Wugang City, known as the CHINA hundred key coal producing cities, achieved new breakthroughs in coal exploration: deep coa ...
Sunday, 17 February 13
STEEL DEMAND WILL HELP TO PUSH UP FREIGHT RATES - VISTAAR
COALspot.com - This freight market has been fairly steady week ended 15 February 2013.
The BDI was slightly up by 0.67 pct closing at 753 points ...
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- Petron Corporation, Philippines
- Metalloyd Limited - United Kingdom
- TNB Fuel Sdn Bhd - Malaysia
- Banpu Public Company Limited - Thailand
- Sree Jayajothi Cements Limited - India
- Uttam Galva Steels Limited - India
- Africa Commodities Group - South Africa
- Interocean Group of Companies - India
- Coal and Oil Company - UAE
- Asmin Koalindo Tuhup - Indonesia
- Indonesian Coal Mining Association
- GN Power Mariveles Coal Plant, Philippines
- Vizag Seaport Private Limited - India
- Eastern Coal Council - USA
- Xindia Steels Limited - India
- Commonwealth Bank - Australia
- Global Business Power Corporation, Philippines
- Sarangani Energy Corporation, Philippines
- Bukit Makmur.PT - Indonesia
- Binh Thuan Hamico - Vietnam
- Directorate Of Revenue Intelligence - India
- Parliament of New Zealand
- Maharashtra Electricity Regulatory Commission - India
- Ministry of Finance - Indonesia
- Kumho Petrochemical, South Korea
- Cigading International Bulk Terminal - Indonesia
- Ind-Barath Power Infra Limited - India
- Minerals Council of Australia
- Bahari Cakrawala Sebuku - Indonesia
- TeaM Sual Corporation - Philippines
- IEA Clean Coal Centre - UK
- GVK Power & Infra Limited - India
- Renaissance Capital - South Africa
- Thai Mozambique Logistica
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Star Paper Mills Limited - India
- Malabar Cements Ltd - India
- Oldendorff Carriers - Singapore
- McConnell Dowell - Australia
- Dalmia Cement Bharat India
- Standard Chartered Bank - UAE
- Antam Resourcindo - Indonesia
- European Bulk Services B.V. - Netherlands
- Global Green Power PLC Corporation, Philippines
- Bhushan Steel Limited - India
- Indogreen Group - Indonesia
- Meralco Power Generation, Philippines
- Baramulti Group, Indonesia
- Power Finance Corporation Ltd., India
- Bayan Resources Tbk. - Indonesia
- VISA Power Limited - India
- Savvy Resources Ltd - HongKong
- Formosa Plastics Group - Taiwan
- Sojitz Corporation - Japan
- Bharathi Cement Corporation - India
- IHS Mccloskey Coal Group - USA
- Indo Tambangraya Megah - Indonesia
- Jindal Steel & Power Ltd - India
- Essar Steel Hazira Ltd - India
- Leighton Contractors Pty Ltd - Australia
- South Luzon Thermal Energy Corporation
- Parry Sugars Refinery, India
- Kartika Selabumi Mining - Indonesia
- Mercator Lines Limited - India
- Sindya Power Generating Company Private Ltd
- Ministry of Mines - Canada
- Globalindo Alam Lestari - Indonesia
- Karaikal Port Pvt Ltd - India
- Manunggal Multi Energi - Indonesia
- Straits Asia Resources Limited - Singapore
- Edison Trading Spa - Italy
- Salva Resources Pvt Ltd - India
- Electricity Authority, New Zealand
- Global Coal Blending Company Limited - Australia
- PNOC Exploration Corporation - Philippines
- ICICI Bank Limited - India
- Anglo American - United Kingdom
- Directorate General of MIneral and Coal - Indonesia
- Ministry of Transport, Egypt
- Chettinad Cement Corporation Ltd - India
- Jaiprakash Power Ventures ltd
- Heidelberg Cement - Germany
- SMG Consultants - Indonesia
- Semirara Mining and Power Corporation, Philippines
- Tamil Nadu electricity Board
- Orica Mining Services - Indonesia
- Wilmar Investment Holdings
- The Treasury - Australian Government
- Singapore Mercantile Exchange
- Toyota Tsusho Corporation, Japan
- AsiaOL BioFuels Corp., Philippines
- Siam City Cement PLC, Thailand
- Orica Australia Pty. Ltd.
- Pendopo Energi Batubara - Indonesia
- The State Trading Corporation of India Ltd
- Maheswari Brothers Coal Limited - India
- PTC India Limited - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Australian Coal Association
- Ambuja Cements Ltd - India
- London Commodity Brokers - England
- Bulk Trading Sa - Switzerland
- Neyveli Lignite Corporation Ltd, - India
- Larsen & Toubro Limited - India
- Latin American Coal - Colombia
- New Zealand Coal & Carbon
- Mercuria Energy - Indonesia
- Simpson Spence & Young - Indonesia
- San Jose City I Power Corp, Philippines
- Mjunction Services Limited - India
- Makarim & Taira - Indonesia
- Agrawal Coal Company - India
- Eastern Energy - Thailand
- Carbofer General Trading SA - India
- Gujarat Mineral Development Corp Ltd - India
- Central Electricity Authority - India
- Aboitiz Power Corporation - Philippines
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Kalimantan Lumbung Energi - Indonesia
- Independent Power Producers Association of India
- Aditya Birla Group - India
- Bangladesh Power Developement Board
- Jorong Barutama Greston.PT - Indonesia
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Attock Cement Pakistan Limited
- Bukit Asam (Persero) Tbk - Indonesia
- Australian Commodity Traders Exchange
- Altura Mining Limited, Indonesia
- Economic Council, Georgia
- Kapuas Tunggal Persada - Indonesia
- Energy Development Corp, Philippines
- Romanian Commodities Exchange
- CIMB Investment Bank - Malaysia
- Gujarat Sidhee Cement - India
- Goldman Sachs - Singapore
- ASAPP Information Group - India
- White Energy Company Limited
- Meenaskhi Energy Private Limited - India
- Kohat Cement Company Ltd. - Pakistan
- Holcim Trading Pte Ltd - Singapore
- Rashtriya Ispat Nigam Limited - India
- Bukit Baiduri Energy - Indonesia
- Trasteel International SA, Italy
- Medco Energi Mining Internasional
- Merrill Lynch Commodities Europe
- Price Waterhouse Coopers - Russia
- Bhoruka Overseas - Indonesia
- SMC Global Power, Philippines
- Grasim Industreis Ltd - India
- Barasentosa Lestari - Indonesia
- Tata Chemicals Ltd - India
- PetroVietnam Power Coal Import and Supply Company
- Indika Energy - Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- Bhatia International Limited - India
- Chamber of Mines of South Africa
- Timah Investasi Mineral - Indoneisa
- Wood Mackenzie - Singapore
- Siam City Cement - Thailand
- Videocon Industries ltd - India
- Miang Besar Coal Terminal - Indonesia
- SN Aboitiz Power Inc, Philippines
- Sical Logistics Limited - India
- Ceylon Electricity Board - Sri Lanka
- Posco Energy - South Korea
- Iligan Light & Power Inc, Philippines
- The University of Queensland
- GMR Energy Limited - India
- Semirara Mining Corp, Philippines
- Energy Link Ltd, New Zealand
- Vedanta Resources Plc - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Pipit Mutiara Jaya. PT, Indonesia
- Deloitte Consulting - India
- Cement Manufacturers Association - India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Mintek Dendrill Indonesia
- Thiess Contractors Indonesia
- Kideco Jaya Agung - Indonesia
- Therma Luzon, Inc, Philippines
- Sinarmas Energy and Mining - Indonesia
- Samtan Co., Ltd - South Korea
- Kaltim Prima Coal - Indonesia
- Electricity Generating Authority of Thailand
- Sakthi Sugars Limited - India
- Lanco Infratech Ltd - India
- Karbindo Abesyapradhi - Indoneisa
- Alfred C Toepfer International GmbH - Germany
- Billiton Holdings Pty Ltd - Australia
- Gujarat Electricity Regulatory Commission - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Central Java Power - Indonesia
- Borneo Indobara - Indonesia
- Georgia Ports Authority, United States
- India Bulls Power Limited - India
- Planning Commission, India
- Riau Bara Harum - Indonesia
- Indian Oil Corporation Limited
- Kobexindo Tractors - Indoneisa
- Coalindo Energy - Indonesia
- Coastal Gujarat Power Limited - India
- Madhucon Powers Ltd - India
- Marubeni Corporation - India
- Port Waratah Coal Services - Australia
- PowerSource Philippines DevCo
- CNBM International Corporation - China
- Kepco SPC Power Corporation, Philippines
- Intertek Mineral Services - Indonesia
- LBH Netherlands Bv - Netherlands
- GAC Shipping (India) Pvt Ltd
- Petrochimia International Co. Ltd.- Taiwan
- Rio Tinto Coal - Australia
- Krishnapatnam Port Company Ltd. - India
- OPG Power Generation Pvt Ltd - India
- Indian Energy Exchange, India
- MS Steel International - UAE
- International Coal Ventures Pvt Ltd - India
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