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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, 06 January 13
FREIGHT MARKET REMAINED FAIRLY STEADY - VISTAAR
WISH YOU ALL HAPPY NEW YEAR
COALspot.com - The freight market remained fairly steady in spite of Christmas / New Year Holidays. The BDI was almos ...
Saturday, 05 January 13
THE SHIPPING MARKET IN 2012 AND LOOKING FORWARD - BIMCO
Global Economy: Things will go up from here
The global economy continues to grow, albeit at a slower pace than previous years. The slower economic ...
Friday, 04 January 13
DRY BULK MARKET LOOKING FOR DIRECTION IN FIRST TRADING DAYS OF THE NEW YEAR - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING NEWS
The dry bulk market is actively looking for its footing at the start of the New Year, as charters have been scarce, as is usually the case during th ...
Thursday, 03 January 13
INDONESIAN SUB-BITUMINOUS COAL SWAPS CLOSED US$ 6.86 HIGHER FOR 2014 DELIVERY
COALspot.com - Swaps prices were changed positively for thermal coal for loading in the first quarter from Indonesia, according to SGX AsiaClear OTC ...
Thursday, 03 January 13
SUPRMAX FREIGHT RATE FROM RED SEA / INDIA IS AROUND MID TEENS - FEARNLEYS
Fearnleys in its weekly report said that, Indian market was very quiet in respect of export of iron ore. For Indo-India trip Supra rate was hovering ...
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- White Energy Company Limited
- Altura Mining Limited, Indonesia
- Central Java Power - Indonesia
- Bank of Tokyo Mitsubishi UFJ Ltd
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Economic Council, Georgia
- International Coal Ventures Pvt Ltd - India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Attock Cement Pakistan Limited
- Mjunction Services Limited - India
- Malabar Cements Ltd - India
- Siam City Cement PLC, Thailand
- Lanco Infratech Ltd - India
- Aditya Birla Group - India
- PetroVietnam Power Coal Import and Supply Company
- Grasim Industreis Ltd - India
- Essar Steel Hazira Ltd - India
- Bharathi Cement Corporation - India
- Jindal Steel & Power Ltd - India
- Formosa Plastics Group - Taiwan
- Bhushan Steel Limited - India
- Price Waterhouse Coopers - Russia
- Savvy Resources Ltd - HongKong
- Kapuas Tunggal Persada - Indonesia
- Renaissance Capital - South Africa
- Samtan Co., Ltd - South Korea
- Banpu Public Company Limited - Thailand
- Alfred C Toepfer International GmbH - Germany
- Riau Bara Harum - Indonesia
- Power Finance Corporation Ltd., India
- Bangladesh Power Developement Board
- Directorate General of MIneral and Coal - Indonesia
- Australian Commodity Traders Exchange
- Simpson Spence & Young - Indonesia
- Energy Link Ltd, New Zealand
- Sarangani Energy Corporation, Philippines
- Indian Oil Corporation Limited
- Sakthi Sugars Limited - India
- San Jose City I Power Corp, Philippines
- Karaikal Port Pvt Ltd - India
- Ceylon Electricity Board - Sri Lanka
- Jorong Barutama Greston.PT - Indonesia
- SN Aboitiz Power Inc, Philippines
- Billiton Holdings Pty Ltd - Australia
- Ambuja Cements Ltd - India
- European Bulk Services B.V. - Netherlands
- The University of Queensland
- Indika Energy - Indonesia
- Bhatia International Limited - India
- GVK Power & Infra Limited - India
- London Commodity Brokers - England
- Kobexindo Tractors - Indoneisa
- Dalmia Cement Bharat India
- Mercuria Energy - Indonesia
- Semirara Mining and Power Corporation, Philippines
- PNOC Exploration Corporation - Philippines
- Trasteel International SA, Italy
- Makarim & Taira - Indonesia
- Timah Investasi Mineral - Indoneisa
- Agrawal Coal Company - India
- Central Electricity Authority - India
- Thiess Contractors Indonesia
- Bayan Resources Tbk. - Indonesia
- Georgia Ports Authority, United States
- Ind-Barath Power Infra Limited - India
- Standard Chartered Bank - UAE
- Toyota Tsusho Corporation, Japan
- Coalindo Energy - Indonesia
- McConnell Dowell - Australia
- Semirara Mining Corp, Philippines
- Posco Energy - South Korea
- Sojitz Corporation - Japan
- Gujarat Sidhee Cement - India
- Krishnapatnam Port Company Ltd. - India
- Energy Development Corp, Philippines
- Merrill Lynch Commodities Europe
- Sinarmas Energy and Mining - Indonesia
- Indian Energy Exchange, India
- Chettinad Cement Corporation Ltd - India
- AsiaOL BioFuels Corp., Philippines
- Asmin Koalindo Tuhup - Indonesia
- Orica Mining Services - Indonesia
- VISA Power Limited - India
- Parry Sugars Refinery, India
- Neyveli Lignite Corporation Ltd, - India
- The State Trading Corporation of India Ltd
- Sical Logistics Limited - India
- Borneo Indobara - Indonesia
- Tata Chemicals Ltd - India
- Wood Mackenzie - Singapore
- Kartika Selabumi Mining - Indonesia
- Rio Tinto Coal - Australia
- GMR Energy Limited - India
- Meenaskhi Energy Private Limited - India
- The Treasury - Australian Government
- GAC Shipping (India) Pvt Ltd
- Global Coal Blending Company Limited - Australia
- Kideco Jaya Agung - Indonesia
- Wilmar Investment Holdings
- Vizag Seaport Private Limited - India
- New Zealand Coal & Carbon
- Indo Tambangraya Megah - Indonesia
- Global Green Power PLC Corporation, Philippines
- Videocon Industries ltd - India
- Madhucon Powers Ltd - India
- Rashtriya Ispat Nigam Limited - India
- Metalloyd Limited - United Kingdom
- Kaltim Prima Coal - Indonesia
- TNB Fuel Sdn Bhd - Malaysia
- Bukit Asam (Persero) Tbk - Indonesia
- Oldendorff Carriers - Singapore
- CIMB Investment Bank - Malaysia
- Medco Energi Mining Internasional
- Star Paper Mills Limited - India
- Globalindo Alam Lestari - Indonesia
- SMC Global Power, Philippines
- Barasentosa Lestari - Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
- Electricity Authority, New Zealand
- Jaiprakash Power Ventures ltd
- Parliament of New Zealand
- Port Waratah Coal Services - Australia
- Anglo American - United Kingdom
- Siam City Cement - Thailand
- Kepco SPC Power Corporation, Philippines
- CNBM International Corporation - China
- Meralco Power Generation, Philippines
- IEA Clean Coal Centre - UK
- ICICI Bank Limited - India
- Karbindo Abesyapradhi - Indoneisa
- Larsen & Toubro Limited - India
- Indogreen Group - Indonesia
- Bukit Makmur.PT - Indonesia
- Holcim Trading Pte Ltd - Singapore
- Offshore Bulk Terminal Pte Ltd, Singapore
- Eastern Coal Council - USA
- India Bulls Power Limited - India
- Sindya Power Generating Company Private Ltd
- Bukit Baiduri Energy - Indonesia
- Global Business Power Corporation, Philippines
- Vijayanagar Sugar Pvt Ltd - India
- Petron Corporation, Philippines
- Kumho Petrochemical, South Korea
- OPG Power Generation Pvt Ltd - India
- Deloitte Consulting - India
- Cement Manufacturers Association - India
- Baramulti Group, Indonesia
- Marubeni Corporation - India
- Coal and Oil Company - UAE
- Electricity Generating Authority of Thailand
- Binh Thuan Hamico - Vietnam
- Chamber of Mines of South Africa
- Africa Commodities Group - South Africa
- Cigading International Bulk Terminal - Indonesia
- Pendopo Energi Batubara - Indonesia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Manunggal Multi Energi - Indonesia
- Bahari Cakrawala Sebuku - Indonesia
- LBH Netherlands Bv - Netherlands
- Maheswari Brothers Coal Limited - India
- Ministry of Mines - Canada
- Romanian Commodities Exchange
- Bulk Trading Sa - Switzerland
- South Luzon Thermal Energy Corporation
- Therma Luzon, Inc, Philippines
- ASAPP Information Group - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Bhoruka Overseas - Indonesia
- Intertek Mineral Services - Indonesia
- Commonwealth Bank - Australia
- Kalimantan Lumbung Energi - Indonesia
- SMG Consultants - Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- Minerals Council of Australia
- Carbofer General Trading SA - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Straits Asia Resources Limited - Singapore
- Orica Australia Pty. Ltd.
- Sree Jayajothi Cements Limited - India
- Indonesian Coal Mining Association
- Uttam Galva Steels Limited - India
- GN Power Mariveles Coal Plant, Philippines
- Tamil Nadu electricity Board
- Ministry of Transport, Egypt
- Heidelberg Cement - Germany
- Latin American Coal - Colombia
- Ministry of Finance - Indonesia
- Goldman Sachs - Singapore
- Mintek Dendrill Indonesia
- TeaM Sual Corporation - Philippines
- Leighton Contractors Pty Ltd - Australia
- Antam Resourcindo - Indonesia
- PTC India Limited - India
- Singapore Mercantile Exchange
- Iligan Light & Power Inc, Philippines
- Interocean Group of Companies - India
- Coastal Gujarat Power Limited - India
- Gujarat Mineral Development Corp Ltd - India
- MS Steel International - UAE
- Edison Trading Spa - Italy
- Aboitiz Power Corporation - Philippines
- Planning Commission, India
- Kohat Cement Company Ltd. - Pakistan
- Gujarat Electricity Regulatory Commission - India
- IHS Mccloskey Coal Group - USA
- Salva Resources Pvt Ltd - India
- Miang Besar Coal Terminal - Indonesia
- Thai Mozambique Logistica
- Independent Power Producers Association of India
- Eastern Energy - Thailand
- Mercator Lines Limited - India
- Maharashtra Electricity Regulatory Commission - India
- PowerSource Philippines DevCo
- Xindia Steels Limited - India
- Vedanta Resources Plc - India
- Directorate Of Revenue Intelligence - India
- Australian Coal Association
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