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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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Friday, 15 February 13
2ND ANNUAL INDONESIA MINING 2013 CONFERENCE
Bringing Indonesia's Mining Stakeholders Together Towards Improving Mining Investment Climate & Operations
Following the success of th ...
Friday, 15 February 13
SCRAPPING TO RISE AS BULKER OWNERS SUFFER - DREWRY MARITIME RESEARCH
Drewry's latest Dry Bulk Forecaster report suggests that cash-strapped shipowners will scrap younger and younger ships this year as the dry bulk ma ...
Thursday, 14 February 13
HANDY: ATLANTIC "STABLE"; PACIFIC "QUIET" - FEARNLEYS
Handy
The Atlantic remain stable with rates for FH from USG around USD 18k. The Pacific remains quiet due to Chinese New Year holidays. Rates were ...
Thursday, 14 February 13
BIMCO FORECASTS MOSTLY HIGHER DRY BULK RATES FOR THE COMING WEEKS - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING
Higher steel demand is expected to keep dry bulk rates elevated during the next six weeks, according to the latest BIMCO forecast. The Organization ...
Wednesday, 13 February 13
6TH ANNUAL CBM CONFERENCE
The 6th Annual CBM conference which will be held in Singapore on 18-21 June 201 offers comprehensive insights into leading CBM projects in the Asia- ...
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- TNB Fuel Sdn Bhd - Malaysia
- Bukit Asam (Persero) Tbk - Indonesia
- Kohat Cement Company Ltd. - Pakistan
- Mercuria Energy - Indonesia
- Electricity Authority, New Zealand
- Agrawal Coal Company - India
- Gujarat Sidhee Cement - India
- Riau Bara Harum - Indonesia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Global Green Power PLC Corporation, Philippines
- Madhucon Powers Ltd - India
- Mercator Lines Limited - India
- CIMB Investment Bank - Malaysia
- Timah Investasi Mineral - Indoneisa
- Jindal Steel & Power Ltd - India
- Ceylon Electricity Board - Sri Lanka
- Coal and Oil Company - UAE
- Vijayanagar Sugar Pvt Ltd - India
- Parry Sugars Refinery, India
- SN Aboitiz Power Inc, Philippines
- Bangladesh Power Developement Board
- Leighton Contractors Pty Ltd - Australia
- Parliament of New Zealand
- Intertek Mineral Services - Indonesia
- Vedanta Resources Plc - India
- Bhushan Steel Limited - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Ministry of Transport, Egypt
- Makarim & Taira - Indonesia
- Commonwealth Bank - Australia
- VISA Power Limited - India
- Therma Luzon, Inc, Philippines
- New Zealand Coal & Carbon
- Goldman Sachs - Singapore
- International Coal Ventures Pvt Ltd - India
- PowerSource Philippines DevCo
- Binh Thuan Hamico - Vietnam
- Carbofer General Trading SA - India
- Bayan Resources Tbk. - Indonesia
- Bharathi Cement Corporation - India
- Kartika Selabumi Mining - Indonesia
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Siam City Cement PLC, Thailand
- Eastern Coal Council - USA
- Grasim Industreis Ltd - India
- Miang Besar Coal Terminal - Indonesia
- Marubeni Corporation - India
- TeaM Sual Corporation - Philippines
- Bahari Cakrawala Sebuku - Indonesia
- Energy Link Ltd, New Zealand
- Sindya Power Generating Company Private Ltd
- Essar Steel Hazira Ltd - India
- Cement Manufacturers Association - India
- Petrochimia International Co. Ltd.- Taiwan
- Central Electricity Authority - India
- Global Business Power Corporation, Philippines
- Salva Resources Pvt Ltd - India
- Energy Development Corp, Philippines
- Chamber of Mines of South Africa
- PTC India Limited - India
- White Energy Company Limited
- Anglo American - United Kingdom
- GN Power Mariveles Coal Plant, Philippines
- Coastal Gujarat Power Limited - India
- Vizag Seaport Private Limited - India
- Bhoruka Overseas - Indonesia
- Cigading International Bulk Terminal - Indonesia
- Global Coal Blending Company Limited - Australia
- CNBM International Corporation - China
- Kobexindo Tractors - Indoneisa
- Jorong Barutama Greston.PT - Indonesia
- Semirara Mining Corp, Philippines
- Trasteel International SA, Italy
- Orica Australia Pty. Ltd.
- Coalindo Energy - Indonesia
- ASAPP Information Group - India
- Sarangani Energy Corporation, Philippines
- Uttam Galva Steels Limited - India
- Krishnapatnam Port Company Ltd. - India
- Gujarat Electricity Regulatory Commission - India
- Tata Chemicals Ltd - India
- Barasentosa Lestari - Indonesia
- London Commodity Brokers - England
- Xindia Steels Limited - India
- Maharashtra Electricity Regulatory Commission - India
- Eastern Energy - Thailand
- Edison Trading Spa - Italy
- The State Trading Corporation of India Ltd
- Kumho Petrochemical, South Korea
- Baramulti Group, Indonesia
- Medco Energi Mining Internasional
- Karaikal Port Pvt Ltd - India
- Manunggal Multi Energi - Indonesia
- Indogreen Group - Indonesia
- Dalmia Cement Bharat India
- Borneo Indobara - Indonesia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Economic Council, Georgia
- Thiess Contractors Indonesia
- Latin American Coal - Colombia
- Chettinad Cement Corporation Ltd - India
- Port Waratah Coal Services - Australia
- Larsen & Toubro Limited - India
- Videocon Industries ltd - India
- San Jose City I Power Corp, Philippines
- Singapore Mercantile Exchange
- Neyveli Lignite Corporation Ltd, - India
- Interocean Group of Companies - India
- Africa Commodities Group - South Africa
- Iligan Light & Power Inc, Philippines
- IEA Clean Coal Centre - UK
- Aboitiz Power Corporation - Philippines
- Ministry of Finance - Indonesia
- Altura Mining Limited, Indonesia
- The Treasury - Australian Government
- Wood Mackenzie - Singapore
- Rio Tinto Coal - Australia
- Billiton Holdings Pty Ltd - Australia
- Ind-Barath Power Infra Limited - India
- European Bulk Services B.V. - Netherlands
- Mjunction Services Limited - India
- Lanco Infratech Ltd - India
- Asmin Koalindo Tuhup - Indonesia
- Central Java Power - Indonesia
- Thai Mozambique Logistica
- GAC Shipping (India) Pvt Ltd
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Ministry of Mines - Canada
- Semirara Mining and Power Corporation, Philippines
- Savvy Resources Ltd - HongKong
- Sojitz Corporation - Japan
- Antam Resourcindo - Indonesia
- Ambuja Cements Ltd - India
- Heidelberg Cement - Germany
- Georgia Ports Authority, United States
- Banpu Public Company Limited - Thailand
- AsiaOL BioFuels Corp., Philippines
- Power Finance Corporation Ltd., India
- Indian Energy Exchange, India
- Holcim Trading Pte Ltd - Singapore
- Malabar Cements Ltd - India
- Mintek Dendrill Indonesia
- Sree Jayajothi Cements Limited - India
- Bulk Trading Sa - Switzerland
- IHS Mccloskey Coal Group - USA
- Rashtriya Ispat Nigam Limited - India
- Toyota Tsusho Corporation, Japan
- Romanian Commodities Exchange
- South Luzon Thermal Energy Corporation
- Bank of Tokyo Mitsubishi UFJ Ltd
- Maheswari Brothers Coal Limited - India
- Deloitte Consulting - India
- SMG Consultants - Indonesia
- GVK Power & Infra Limited - India
- The University of Queensland
- Meenaskhi Energy Private Limited - India
- Jaiprakash Power Ventures ltd
- LBH Netherlands Bv - Netherlands
- Kideco Jaya Agung - Indonesia
- Attock Cement Pakistan Limited
- Wilmar Investment Holdings
- Bukit Baiduri Energy - Indonesia
- Independent Power Producers Association of India
- Sical Logistics Limited - India
- Minerals Council of Australia
- PetroVietnam Power Coal Import and Supply Company
- Price Waterhouse Coopers - Russia
- Gujarat Mineral Development Corp Ltd - India
- Tamil Nadu electricity Board
- SMC Global Power, Philippines
- Sakthi Sugars Limited - India
- Samtan Co., Ltd - South Korea
- Bhatia International Limited - India
- ICICI Bank Limited - India
- Indika Energy - Indonesia
- Indo Tambangraya Megah - Indonesia
- Indonesian Coal Mining Association
- Kapuas Tunggal Persada - Indonesia
- Orica Mining Services - Indonesia
- Kepco SPC Power Corporation, Philippines
- Meralco Power Generation, Philippines
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Kalimantan Lumbung Energi - Indonesia
- OPG Power Generation Pvt Ltd - India
- Metalloyd Limited - United Kingdom
- Globalindo Alam Lestari - Indonesia
- Indian Oil Corporation Limited
- Kaltim Prima Coal - Indonesia
- Aditya Birla Group - India
- Electricity Generating Authority of Thailand
- Merrill Lynch Commodities Europe
- Bukit Makmur.PT - Indonesia
- Directorate Of Revenue Intelligence - India
- McConnell Dowell - Australia
- Alfred C Toepfer International GmbH - Germany
- Posco Energy - South Korea
- Sinarmas Energy and Mining - Indonesia
- India Bulls Power Limited - India
- Australian Commodity Traders Exchange
- Renaissance Capital - South Africa
- Siam City Cement - Thailand
- PNOC Exploration Corporation - Philippines
- Planning Commission, India
- Petron Corporation, Philippines
- Pipit Mutiara Jaya. PT, Indonesia
- Karbindo Abesyapradhi - Indoneisa
- Oldendorff Carriers - Singapore
- Formosa Plastics Group - Taiwan
- GMR Energy Limited - India
- Standard Chartered Bank - UAE
- Star Paper Mills Limited - India
- Australian Coal Association
- Straits Asia Resources Limited - Singapore
- Simpson Spence & Young - Indonesia
- MS Steel International - UAE
- Pendopo Energi Batubara - Indonesia
- Directorate General of MIneral and Coal - Indonesia
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