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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, 15 January 13
GRANT SMITH APPOINTED GROUP MANAGING DIRECTOR OF BRAEMAR ADJUSTING
The Board of Braemar Adjusting is delighted to announce the appointment of Grant Smith as Group Managing Director of the company with immediate effe ...
Tuesday, 15 January 13
2ND MYANMAR MINING SUMMIT & OFFICIAL HOST MINISTRY OF MINES TO WELCOME OVER 200 DELEGATES NEXT WEEK
Press Release: The Ministry of Mines is hosting the 2nd Myanmar Mining Summit in Yangon on 21-24 January to unravel the local mining climate, prospe ...
Monday, 14 January 13
NEWCASTLE PORT SHIPPED 2.32 PERCENT LESS COAL W/E 14 JANUARY 2013
COALspot.com - Newcastle port in Australia has loaded 3,123,312 MT of thermal and coking coal for week ended 0700 hours 14 January 2013, Newca ...
Monday, 14 January 13
THE COAL MONGOLIA - 2013 OFFICIALLY IN COOPERATION WITH TOP MINING COMPANIES
Press Release: Mongolian first mining portal site Mining.mn has already started its preparation of the International Conference “COAL MONGOLIA ...
Monday, 14 January 13
NTPC INVITES BIDS FOR 500K MT OF IMPORTED COAL
COALspot.com - NTPC Limited (formerly National Thermal Power Corporation) is the largest Indian state-owned electric utilities company called for a ...
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- SN Aboitiz Power Inc, Philippines
- AsiaOL BioFuels Corp., Philippines
- Bulk Trading Sa - Switzerland
- Sical Logistics Limited - India
- Samtan Co., Ltd - South Korea
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Parry Sugars Refinery, India
- Kartika Selabumi Mining - Indonesia
- Mercuria Energy - Indonesia
- CNBM International Corporation - China
- Sojitz Corporation - Japan
- Kalimantan Lumbung Energi - Indonesia
- Ministry of Mines - Canada
- Semirara Mining Corp, Philippines
- Savvy Resources Ltd - HongKong
- Edison Trading Spa - Italy
- Marubeni Corporation - India
- Sarangani Energy Corporation, Philippines
- Sakthi Sugars Limited - India
- Rashtriya Ispat Nigam Limited - India
- Pendopo Energi Batubara - Indonesia
- Binh Thuan Hamico - Vietnam
- Gujarat Mineral Development Corp Ltd - India
- Latin American Coal - Colombia
- Kaltim Prima Coal - Indonesia
- Attock Cement Pakistan Limited
- Tata Chemicals Ltd - India
- Ceylon Electricity Board - Sri Lanka
- Madhucon Powers Ltd - India
- Therma Luzon, Inc, Philippines
- European Bulk Services B.V. - Netherlands
- London Commodity Brokers - England
- PNOC Exploration Corporation - Philippines
- Sinarmas Energy and Mining - Indonesia
- Uttam Galva Steels Limited - India
- Africa Commodities Group - South Africa
- Aboitiz Power Corporation - Philippines
- Cement Manufacturers Association - India
- GAC Shipping (India) Pvt Ltd
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Energy Link Ltd, New Zealand
- Indika Energy - Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- Simpson Spence & Young - Indonesia
- Straits Asia Resources Limited - Singapore
- Directorate General of MIneral and Coal - Indonesia
- Posco Energy - South Korea
- Kobexindo Tractors - Indoneisa
- Lanco Infratech Ltd - India
- Australian Commodity Traders Exchange
- PowerSource Philippines DevCo
- Directorate Of Revenue Intelligence - India
- Banpu Public Company Limited - Thailand
- Rio Tinto Coal - Australia
- Indonesian Coal Mining Association
- PTC India Limited - India
- VISA Power Limited - India
- Malabar Cements Ltd - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Romanian Commodities Exchange
- Trasteel International SA, Italy
- Electricity Generating Authority of Thailand
- Semirara Mining and Power Corporation, Philippines
- Agrawal Coal Company - India
- New Zealand Coal & Carbon
- Central Java Power - Indonesia
- Wood Mackenzie - Singapore
- Anglo American - United Kingdom
- Orica Australia Pty. Ltd.
- The State Trading Corporation of India Ltd
- Indian Oil Corporation Limited
- Antam Resourcindo - Indonesia
- Eastern Energy - Thailand
- Xindia Steels Limited - India
- Petron Corporation, Philippines
- Star Paper Mills Limited - India
- Kideco Jaya Agung - Indonesia
- Salva Resources Pvt Ltd - India
- Jaiprakash Power Ventures ltd
- Tamil Nadu electricity Board
- Oldendorff Carriers - Singapore
- Georgia Ports Authority, United States
- Baramulti Group, Indonesia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Commonwealth Bank - Australia
- Gujarat Electricity Regulatory Commission - India
- Thai Mozambique Logistica
- Iligan Light & Power Inc, Philippines
- Holcim Trading Pte Ltd - Singapore
- Indogreen Group - Indonesia
- ASAPP Information Group - India
- TNB Fuel Sdn Bhd - Malaysia
- Kapuas Tunggal Persada - Indonesia
- Timah Investasi Mineral - Indoneisa
- Electricity Authority, New Zealand
- Makarim & Taira - Indonesia
- Alfred C Toepfer International GmbH - Germany
- Metalloyd Limited - United Kingdom
- Goldman Sachs - Singapore
- IEA Clean Coal Centre - UK
- Energy Development Corp, Philippines
- Medco Energi Mining Internasional
- Kumho Petrochemical, South Korea
- Asmin Koalindo Tuhup - Indonesia
- Deloitte Consulting - India
- Siam City Cement PLC, Thailand
- Bangladesh Power Developement Board
- Chamber of Mines of South Africa
- Australian Coal Association
- McConnell Dowell - Australia
- Standard Chartered Bank - UAE
- Mjunction Services Limited - India
- San Jose City I Power Corp, Philippines
- Ind-Barath Power Infra Limited - India
- Bayan Resources Tbk. - Indonesia
- Kepco SPC Power Corporation, Philippines
- Independent Power Producers Association of India
- Leighton Contractors Pty Ltd - Australia
- Ministry of Transport, Egypt
- Parliament of New Zealand
- GVK Power & Infra Limited - India
- Gujarat Sidhee Cement - India
- Maharashtra Electricity Regulatory Commission - India
- Carbofer General Trading SA - India
- Ministry of Finance - Indonesia
- TeaM Sual Corporation - Philippines
- The University of Queensland
- The Treasury - Australian Government
- Meenaskhi Energy Private Limited - India
- White Energy Company Limited
- ICICI Bank Limited - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Merrill Lynch Commodities Europe
- Sindya Power Generating Company Private Ltd
- Riau Bara Harum - Indonesia
- Coalindo Energy - Indonesia
- IHS Mccloskey Coal Group - USA
- Siam City Cement - Thailand
- Karaikal Port Pvt Ltd - India
- Economic Council, Georgia
- Global Business Power Corporation, Philippines
- Vedanta Resources Plc - India
- Central Electricity Authority - India
- Minerals Council of Australia
- Jorong Barutama Greston.PT - Indonesia
- Grasim Industreis Ltd - India
- SMC Global Power, Philippines
- Coastal Gujarat Power Limited - India
- OPG Power Generation Pvt Ltd - India
- Bhoruka Overseas - Indonesia
- Cigading International Bulk Terminal - Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
- Krishnapatnam Port Company Ltd. - India
- Formosa Plastics Group - Taiwan
- India Bulls Power Limited - India
- Bukit Asam (Persero) Tbk - Indonesia
- Jindal Steel & Power Ltd - India
- Borneo Indobara - Indonesia
- Vizag Seaport Private Limited - India
- Planning Commission, India
- Heidelberg Cement - Germany
- Manunggal Multi Energi - Indonesia
- Bahari Cakrawala Sebuku - Indonesia
- Global Coal Blending Company Limited - Australia
- Toyota Tsusho Corporation, Japan
- Orica Mining Services - Indonesia
- Miang Besar Coal Terminal - Indonesia
- Bharathi Cement Corporation - India
- Wilmar Investment Holdings
- Chettinad Cement Corporation Ltd - India
- Bhatia International Limited - India
- Aditya Birla Group - India
- Altura Mining Limited, Indonesia
- Meralco Power Generation, Philippines
- Globalindo Alam Lestari - Indonesia
- Bukit Baiduri Energy - Indonesia
- International Coal Ventures Pvt Ltd - India
- Videocon Industries ltd - India
- LBH Netherlands Bv - Netherlands
- Barasentosa Lestari - Indonesia
- Eastern Coal Council - USA
- GMR Energy Limited - India
- GN Power Mariveles Coal Plant, Philippines
- Thiess Contractors Indonesia
- Mercator Lines Limited - India
- Port Waratah Coal Services - Australia
- Coal and Oil Company - UAE
- Dalmia Cement Bharat India
- Essar Steel Hazira Ltd - India
- Global Green Power PLC Corporation, Philippines
- Petrochimia International Co. Ltd.- Taiwan
- Neyveli Lignite Corporation Ltd, - India
- Larsen & Toubro Limited - India
- Indian Energy Exchange, India
- South Luzon Thermal Energy Corporation
- PetroVietnam Power Coal Import and Supply Company
- Maheswari Brothers Coal Limited - India
- Renaissance Capital - South Africa
- Power Finance Corporation Ltd., India
- SMG Consultants - Indonesia
- Mintek Dendrill Indonesia
- Interocean Group of Companies - India
- Bhushan Steel Limited - India
- Intertek Mineral Services - Indonesia
- Indo Tambangraya Megah - Indonesia
- MS Steel International - UAE
- CIMB Investment Bank - Malaysia
- Sree Jayajothi Cements Limited - India
- Kohat Cement Company Ltd. - Pakistan
- Singapore Mercantile Exchange
- Price Waterhouse Coopers - Russia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Ambuja Cements Ltd - India
- Karbindo Abesyapradhi - Indoneisa
- Bukit Makmur.PT - Indonesia
- Billiton Holdings Pty Ltd - Australia
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