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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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Sunday, 13 January 13
THE FREIGHT MARKET: FAIRLY STEADY - VISTAAR
COALspot.com - The freight market was fairly steady with all the indices up with maximum gain in the Panamax segment. The BDI was up by 7.65 pct clo ...
Saturday, 12 January 13
SUB-BIT FOB INDONESIA COAL SWAPS: WEAK
COALspot.com - Sub-Bit Indonesia coal swaps (FOB ) for average Q1’ 2013 delivery has lost 0.32 percent WoW but CFR South China coal ship ...
Saturday, 12 January 13
HIGHER COAL PRICES: SEASONAL EFFECT
COALspot.com : Bahana Securities, one of the leading securities in Indonesia, said in its latest coal outlook that, on US and China&rsquo ...
Friday, 11 January 13
HBA HAS JUMPED BY US$ 5.80 PMT IN JANUARY 2013
COALspot.com - The Indonesian government has declared bench mark price for coal higher than December price. The monthly coal reference price f ...
Thursday, 10 January 13
PANAMAX : SOME GLIMMERS OF HOPE MID WEEK - FEARNLEYS
According to Fearnley’s weekly report, the Atlantic handy market is stable with rates around USD 11k for Cont-Feast and USD 17k bss USG/Feast. ...
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- Standard Chartered Bank - UAE
- Offshore Bulk Terminal Pte Ltd, Singapore
- Economic Council, Georgia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Pendopo Energi Batubara - Indonesia
- International Coal Ventures Pvt Ltd - India
- Goldman Sachs - Singapore
- Chamber of Mines of South Africa
- Leighton Contractors Pty Ltd - Australia
- SN Aboitiz Power Inc, Philippines
- Kapuas Tunggal Persada - Indonesia
- Chettinad Cement Corporation Ltd - India
- South Luzon Thermal Energy Corporation
- Global Green Power PLC Corporation, Philippines
- Maharashtra Electricity Regulatory Commission - India
- GAC Shipping (India) Pvt Ltd
- Metalloyd Limited - United Kingdom
- Pipit Mutiara Jaya. PT, Indonesia
- Indian Energy Exchange, India
- Kaltim Prima Coal - Indonesia
- Planning Commission, India
- Global Coal Blending Company Limited - Australia
- Marubeni Corporation - India
- Coalindo Energy - Indonesia
- Riau Bara Harum - Indonesia
- Ministry of Finance - Indonesia
- White Energy Company Limited
- Meralco Power Generation, Philippines
- Petrochimia International Co. Ltd.- Taiwan
- Eastern Energy - Thailand
- Bukit Makmur.PT - Indonesia
- London Commodity Brokers - England
- Rashtriya Ispat Nigam Limited - India
- Coastal Gujarat Power Limited - India
- Interocean Group of Companies - India
- Central Electricity Authority - India
- Kumho Petrochemical, South Korea
- Vedanta Resources Plc - India
- Port Waratah Coal Services - Australia
- The State Trading Corporation of India Ltd
- Orica Australia Pty. Ltd.
- Bangladesh Power Developement Board
- Romanian Commodities Exchange
- Petron Corporation, Philippines
- Wilmar Investment Holdings
- Cement Manufacturers Association - India
- Electricity Generating Authority of Thailand
- Salva Resources Pvt Ltd - India
- Bhatia International Limited - India
- PetroVietnam Power Coal Import and Supply Company
- Mercator Lines Limited - India
- Xindia Steels Limited - India
- Wood Mackenzie - Singapore
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Vijayanagar Sugar Pvt Ltd - India
- Independent Power Producers Association of India
- Energy Development Corp, Philippines
- Gujarat Sidhee Cement - India
- Power Finance Corporation Ltd., India
- Attock Cement Pakistan Limited
- Kartika Selabumi Mining - Indonesia
- Anglo American - United Kingdom
- Edison Trading Spa - Italy
- Altura Mining Limited, Indonesia
- Cigading International Bulk Terminal - Indonesia
- Star Paper Mills Limited - India
- Mjunction Services Limited - India
- Kobexindo Tractors - Indoneisa
- The Treasury - Australian Government
- MS Steel International - UAE
- Latin American Coal - Colombia
- LBH Netherlands Bv - Netherlands
- Orica Mining Services - Indonesia
- VISA Power Limited - India
- ICICI Bank Limited - India
- ASAPP Information Group - India
- CIMB Investment Bank - Malaysia
- Agrawal Coal Company - India
- Videocon Industries ltd - India
- Indika Energy - Indonesia
- Merrill Lynch Commodities Europe
- Africa Commodities Group - South Africa
- Karbindo Abesyapradhi - Indoneisa
- PNOC Exploration Corporation - Philippines
- Siam City Cement - Thailand
- TNB Fuel Sdn Bhd - Malaysia
- Georgia Ports Authority, United States
- Kideco Jaya Agung - Indonesia
- Formosa Plastics Group - Taiwan
- Heidelberg Cement - Germany
- Semirara Mining Corp, Philippines
- Jaiprakash Power Ventures ltd
- Bukit Baiduri Energy - Indonesia
- CNBM International Corporation - China
- Carbofer General Trading SA - India
- SMC Global Power, Philippines
- Sindya Power Generating Company Private Ltd
- Posco Energy - South Korea
- Ind-Barath Power Infra Limited - India
- Kepco SPC Power Corporation, Philippines
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- The University of Queensland
- Neyveli Lignite Corporation Ltd, - India
- Minerals Council of Australia
- Holcim Trading Pte Ltd - Singapore
- Aboitiz Power Corporation - Philippines
- Sarangani Energy Corporation, Philippines
- Miang Besar Coal Terminal - Indonesia
- Ceylon Electricity Board - Sri Lanka
- Manunggal Multi Energi - Indonesia
- Eastern Coal Council - USA
- Bukit Asam (Persero) Tbk - Indonesia
- Coal and Oil Company - UAE
- Ministry of Transport, Egypt
- Antam Resourcindo - Indonesia
- Thiess Contractors Indonesia
- Uttam Galva Steels Limited - India
- Rio Tinto Coal - Australia
- Energy Link Ltd, New Zealand
- Sinarmas Energy and Mining - Indonesia
- Bhoruka Overseas - Indonesia
- Makarim & Taira - Indonesia
- IEA Clean Coal Centre - UK
- Parliament of New Zealand
- GVK Power & Infra Limited - India
- Sojitz Corporation - Japan
- Central Java Power - Indonesia
- Indogreen Group - Indonesia
- Grasim Industreis Ltd - India
- Meenaskhi Energy Private Limited - India
- Parry Sugars Refinery, India
- SMG Consultants - Indonesia
- Dalmia Cement Bharat India
- Madhucon Powers Ltd - India
- Essar Steel Hazira Ltd - India
- Mintek Dendrill Indonesia
- Globalindo Alam Lestari - Indonesia
- Straits Asia Resources Limited - Singapore
- Directorate General of MIneral and Coal - Indonesia
- OPG Power Generation Pvt Ltd - India
- Directorate Of Revenue Intelligence - India
- Tata Chemicals Ltd - India
- PowerSource Philippines DevCo
- Oldendorff Carriers - Singapore
- Tamil Nadu electricity Board
- AsiaOL BioFuels Corp., Philippines
- Ambuja Cements Ltd - India
- Vizag Seaport Private Limited - India
- San Jose City I Power Corp, Philippines
- Barasentosa Lestari - Indonesia
- Bayan Resources Tbk. - Indonesia
- Gujarat Electricity Regulatory Commission - India
- Price Waterhouse Coopers - Russia
- Toyota Tsusho Corporation, Japan
- Global Business Power Corporation, Philippines
- European Bulk Services B.V. - Netherlands
- Binh Thuan Hamico - Vietnam
- Jindal Steel & Power Ltd - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Intertek Mineral Services - Indonesia
- Trasteel International SA, Italy
- Kohat Cement Company Ltd. - Pakistan
- Renaissance Capital - South Africa
- Lanco Infratech Ltd - India
- New Zealand Coal & Carbon
- Savvy Resources Ltd - HongKong
- Borneo Indobara - Indonesia
- Electricity Authority, New Zealand
- Bulk Trading Sa - Switzerland
- GN Power Mariveles Coal Plant, Philippines
- Deloitte Consulting - India
- Samtan Co., Ltd - South Korea
- IHS Mccloskey Coal Group - USA
- Simpson Spence & Young - Indonesia
- TeaM Sual Corporation - Philippines
- Gujarat Mineral Development Corp Ltd - India
- Medco Energi Mining Internasional
- Sical Logistics Limited - India
- Mercuria Energy - Indonesia
- Thai Mozambique Logistica
- Indian Oil Corporation Limited
- Kalimantan Lumbung Energi - Indonesia
- Baramulti Group, Indonesia
- Asmin Koalindo Tuhup - Indonesia
- Billiton Holdings Pty Ltd - Australia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Iligan Light & Power Inc, Philippines
- GMR Energy Limited - India
- Bharathi Cement Corporation - India
- Semirara Mining and Power Corporation, Philippines
- Aditya Birla Group - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- India Bulls Power Limited - India
- Indo Tambangraya Megah - Indonesia
- Larsen & Toubro Limited - India
- Singapore Mercantile Exchange
- Maheswari Brothers Coal Limited - India
- PTC India Limited - India
- Karaikal Port Pvt Ltd - India
- Banpu Public Company Limited - Thailand
- Malabar Cements Ltd - India
- Bhushan Steel Limited - India
- Sakthi Sugars Limited - India
- Ministry of Mines - Canada
- Krishnapatnam Port Company Ltd. - India
- Jorong Barutama Greston.PT - Indonesia
- Commonwealth Bank - Australia
- Siam City Cement PLC, Thailand
- McConnell Dowell - Australia
- Australian Coal Association
- Bahari Cakrawala Sebuku - Indonesia
- Australian Commodity Traders Exchange
- Alfred C Toepfer International GmbH - Germany
- Therma Luzon, Inc, Philippines
- Indonesian Coal Mining Association
- Timah Investasi Mineral - Indoneisa
- Sree Jayajothi Cements Limited - India
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