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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, 08 February 13
NORTH P&I CLUB WARNS OF LIQUEFACTION RISK FOR BAUXITE CARGOES
The ‘A’ rated 170 million GT North P&I club has warned shipowners carrying bauxite aluminium ore cargoes that they have the potentia ...
Thursday, 07 February 13
CHINA NDRC APPROVED 10 BILLION YUAN POWER GENERATION PROJECTS
NDRC of China currently announced that some of power grid and power station in Jiangxu, Sichuan and Anhui Province would be newly constructed or ext ...
Thursday, 07 February 13
CAPESIZE : MORE ACTIVE WEEK IN THE PACIFIC - FEARNLEYS AS
Handy
The Atlantic market remained stable with no significant movement in rates. Rates from USG to FEast were around USD 18k and Black Sea to Feast ...
Thursday, 07 February 13
WEAK STEEL MARKET MEANS IRON ORE RALLY LIKELY TO END SOON - FITCH
The sharp rebound in iron ore prices over the last couple of months will hurt margins at non-integrated steel producers in the first quarter of 2013 ...
Tuesday, 05 February 13
THE SHIPPING SECTOR IS " NAVIGATING IN STORMY WATERS" - PWC
The vulnerabilities of the global economy have been exposed and have more than played their part in making 2011 one of the worst years of shipping i ...
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- South Luzon Thermal Energy Corporation
- Indika Energy - Indonesia
- Economic Council, Georgia
- Indian Oil Corporation Limited
- Coastal Gujarat Power Limited - India
- CNBM International Corporation - China
- Siam City Cement PLC, Thailand
- Bukit Baiduri Energy - Indonesia
- Bukit Makmur.PT - Indonesia
- Minerals Council of Australia
- Petrochimia International Co. Ltd.- Taiwan
- Karbindo Abesyapradhi - Indoneisa
- Chamber of Mines of South Africa
- Sical Logistics Limited - India
- VISA Power Limited - India
- Simpson Spence & Young - Indonesia
- AsiaOL BioFuels Corp., Philippines
- Parliament of New Zealand
- Siam City Cement - Thailand
- Xindia Steels Limited - India
- San Jose City I Power Corp, Philippines
- Power Finance Corporation Ltd., India
- Cement Manufacturers Association - India
- Mercuria Energy - Indonesia
- Jindal Steel & Power Ltd - India
- PNOC Exploration Corporation - Philippines
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Iligan Light & Power Inc, Philippines
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Metalloyd Limited - United Kingdom
- White Energy Company Limited
- SMG Consultants - Indonesia
- Thai Mozambique Logistica
- Parry Sugars Refinery, India
- Bulk Trading Sa - Switzerland
- Anglo American - United Kingdom
- Energy Link Ltd, New Zealand
- European Bulk Services B.V. - Netherlands
- New Zealand Coal & Carbon
- Standard Chartered Bank - UAE
- GAC Shipping (India) Pvt Ltd
- MS Steel International - UAE
- Kideco Jaya Agung - Indonesia
- Kalimantan Lumbung Energi - Indonesia
- Wilmar Investment Holdings
- Essar Steel Hazira Ltd - India
- Holcim Trading Pte Ltd - Singapore
- Cigading International Bulk Terminal - Indonesia
- Attock Cement Pakistan Limited
- Eastern Energy - Thailand
- Oldendorff Carriers - Singapore
- Baramulti Group, Indonesia
- Electricity Generating Authority of Thailand
- Ministry of Transport, Egypt
- Meralco Power Generation, Philippines
- Krishnapatnam Port Company Ltd. - India
- ICICI Bank Limited - India
- The Treasury - Australian Government
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Aboitiz Power Corporation - Philippines
- Bayan Resources Tbk. - Indonesia
- Independent Power Producers Association of India
- Banpu Public Company Limited - Thailand
- CIMB Investment Bank - Malaysia
- Ambuja Cements Ltd - India
- GVK Power & Infra Limited - India
- Binh Thuan Hamico - Vietnam
- India Bulls Power Limited - India
- Interocean Group of Companies - India
- Maharashtra Electricity Regulatory Commission - India
- Madhucon Powers Ltd - India
- Bahari Cakrawala Sebuku - Indonesia
- Renaissance Capital - South Africa
- Billiton Holdings Pty Ltd - Australia
- Energy Development Corp, Philippines
- Port Waratah Coal Services - Australia
- International Coal Ventures Pvt Ltd - India
- Medco Energi Mining Internasional
- Heidelberg Cement - Germany
- Africa Commodities Group - South Africa
- Kapuas Tunggal Persada - Indonesia
- Bangladesh Power Developement Board
- Malabar Cements Ltd - India
- Savvy Resources Ltd - HongKong
- Manunggal Multi Energi - Indonesia
- Indo Tambangraya Megah - Indonesia
- Pendopo Energi Batubara - Indonesia
- TeaM Sual Corporation - Philippines
- Ministry of Mines - Canada
- Toyota Tsusho Corporation, Japan
- Deloitte Consulting - India
- Central Java Power - Indonesia
- Georgia Ports Authority, United States
- Karaikal Port Pvt Ltd - India
- Barasentosa Lestari - Indonesia
- Larsen & Toubro Limited - India
- PTC India Limited - India
- Therma Luzon, Inc, Philippines
- Star Paper Mills Limited - India
- Orica Mining Services - Indonesia
- Sinarmas Energy and Mining - Indonesia
- Bhushan Steel Limited - India
- Jaiprakash Power Ventures ltd
- Jorong Barutama Greston.PT - Indonesia
- Kepco SPC Power Corporation, Philippines
- Pipit Mutiara Jaya. PT, Indonesia
- OPG Power Generation Pvt Ltd - India
- Thiess Contractors Indonesia
- Leighton Contractors Pty Ltd - Australia
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Price Waterhouse Coopers - Russia
- Indian Energy Exchange, India
- IEA Clean Coal Centre - UK
- Sojitz Corporation - Japan
- Makarim & Taira - Indonesia
- Sree Jayajothi Cements Limited - India
- Riau Bara Harum - Indonesia
- Petron Corporation, Philippines
- The State Trading Corporation of India Ltd
- Gujarat Mineral Development Corp Ltd - India
- Antam Resourcindo - Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- LBH Netherlands Bv - Netherlands
- Semirara Mining and Power Corporation, Philippines
- Romanian Commodities Exchange
- Wood Mackenzie - Singapore
- PetroVietnam Power Coal Import and Supply Company
- Bhoruka Overseas - Indonesia
- Trasteel International SA, Italy
- Merrill Lynch Commodities Europe
- Salva Resources Pvt Ltd - India
- Ind-Barath Power Infra Limited - India
- Kohat Cement Company Ltd. - Pakistan
- Grasim Industreis Ltd - India
- Rio Tinto Coal - Australia
- Ceylon Electricity Board - Sri Lanka
- Singapore Mercantile Exchange
- Chettinad Cement Corporation Ltd - India
- Mjunction Services Limited - India
- Mercator Lines Limited - India
- Latin American Coal - Colombia
- Orica Australia Pty. Ltd.
- Uttam Galva Steels Limited - India
- Gujarat Electricity Regulatory Commission - India
- Bukit Asam (Persero) Tbk - Indonesia
- Miang Besar Coal Terminal - Indonesia
- Alfred C Toepfer International GmbH - Germany
- Tata Chemicals Ltd - India
- Dalmia Cement Bharat India
- Indonesian Coal Mining Association
- Directorate Of Revenue Intelligence - India
- Edison Trading Spa - Italy
- GN Power Mariveles Coal Plant, Philippines
- Straits Asia Resources Limited - Singapore
- Kobexindo Tractors - Indoneisa
- Sakthi Sugars Limited - India
- Indogreen Group - Indonesia
- Borneo Indobara - Indonesia
- Tamil Nadu electricity Board
- Globalindo Alam Lestari - Indonesia
- Global Green Power PLC Corporation, Philippines
- Carbofer General Trading SA - India
- TNB Fuel Sdn Bhd - Malaysia
- Maheswari Brothers Coal Limited - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Sarangani Energy Corporation, Philippines
- Electricity Authority, New Zealand
- Videocon Industries ltd - India
- London Commodity Brokers - England
- Coal and Oil Company - UAE
- Marubeni Corporation - India
- Asmin Koalindo Tuhup - Indonesia
- Posco Energy - South Korea
- Planning Commission, India
- Kaltim Prima Coal - Indonesia
- Central Electricity Authority - India
- Kumho Petrochemical, South Korea
- Australian Commodity Traders Exchange
- ASAPP Information Group - India
- Bhatia International Limited - India
- Meenaskhi Energy Private Limited - India
- Global Business Power Corporation, Philippines
- Sindya Power Generating Company Private Ltd
- Formosa Plastics Group - Taiwan
- Altura Mining Limited, Indonesia
- Timah Investasi Mineral - Indoneisa
- Goldman Sachs - Singapore
- Bharathi Cement Corporation - India
- Eastern Coal Council - USA
- Bank of Tokyo Mitsubishi UFJ Ltd
- PowerSource Philippines DevCo
- Mintek Dendrill Indonesia
- McConnell Dowell - Australia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Rashtriya Ispat Nigam Limited - India
- Agrawal Coal Company - India
- Gujarat Sidhee Cement - India
- IHS Mccloskey Coal Group - USA
- Ministry of Finance - Indonesia
- Lanco Infratech Ltd - India
- Semirara Mining Corp, Philippines
- Directorate General of MIneral and Coal - Indonesia
- Intertek Mineral Services - Indonesia
- Commonwealth Bank - Australia
- The University of Queensland
- SMC Global Power, Philippines
- Vedanta Resources Plc - India
- Coalindo Energy - Indonesia
- GMR Energy Limited - India
- Samtan Co., Ltd - South Korea
- Global Coal Blending Company Limited - Australia
- Vizag Seaport Private Limited - India
- Australian Coal Association
- SN Aboitiz Power Inc, Philippines
- Kartika Selabumi Mining - Indonesia
- Neyveli Lignite Corporation Ltd, - India
- Aditya Birla Group - India
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