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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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Saturday, 22 December 12
FALL IN CAPE AND PANAMAX RATES DRAG BDI INDEX - VISTAAR
COALspot.com - The freight market further softened this week closing at 700 points (down by 10.71 pct). The cape index continued to fall and w ...
Saturday, 22 December 12
DELTA DUNIA MAKMUR PRODUCED 3.2 MILLION TONS OF COAL IN NOVEMBER' 12
COALspot.com - PT Delta Dunia Makmur Tbk., has removed 28.1 million bcm* (+1.8% YoY) of Overburden in November 2012 while coal production was at 3.2 ...
Friday, 21 December 12
JORC CODE, 2012 EDITION NOW FINALIZED
COALspot.com - The JORC Committee has announced that, the completion of the review of the JORC Code of 2012 Edition.
The JORC Code, 2012 Ed ...
Thursday, 20 December 12
COAL CLOSING IN ON OIL AS WORLD'S TOP ENERGY SOURCE BY 2017
COALspot.com - Coal’s share of the global energy mix continues to rise, and by 2017 coal will come close to surpassing oil as the world’ ...
Thursday, 20 December 12
CHINA'S IRON ORE AND COAL DEMAND WILL SHAPE THE CAPESIZE DRY BULK TRADE DURING 2013 - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING NEWS
Despite the best efforts from ship owners to help alleviate the current tonnage oversupply issue in the dry bulk segment, especially in the larger v ...
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- Leighton Contractors Pty Ltd - Australia
- TNB Fuel Sdn Bhd - Malaysia
- Kalimantan Lumbung Energi - Indonesia
- Minerals Council of Australia
- Bangladesh Power Developement Board
- New Zealand Coal & Carbon
- Medco Energi Mining Internasional
- Central Electricity Authority - India
- VISA Power Limited - India
- Grasim Industreis Ltd - India
- Bharathi Cement Corporation - India
- PTC India Limited - India
- Bayan Resources Tbk. - Indonesia
- ICICI Bank Limited - India
- Pendopo Energi Batubara - Indonesia
- Dalmia Cement Bharat India
- Jindal Steel & Power Ltd - India
- SMG Consultants - Indonesia
- Planning Commission, India
- Price Waterhouse Coopers - Russia
- Semirara Mining and Power Corporation, Philippines
- Wood Mackenzie - Singapore
- Jaiprakash Power Ventures ltd
- Goldman Sachs - Singapore
- Samtan Co., Ltd - South Korea
- Electricity Generating Authority of Thailand
- Port Waratah Coal Services - Australia
- Bukit Baiduri Energy - Indonesia
- Mercator Lines Limited - India
- Anglo American - United Kingdom
- Wilmar Investment Holdings
- Marubeni Corporation - India
- Bukit Asam (Persero) Tbk - Indonesia
- Binh Thuan Hamico - Vietnam
- South Luzon Thermal Energy Corporation
- ASAPP Information Group - India
- Gujarat Electricity Regulatory Commission - India
- MS Steel International - UAE
- Makarim & Taira - Indonesia
- Thai Mozambique Logistica
- Videocon Industries ltd - India
- Power Finance Corporation Ltd., India
- Formosa Plastics Group - Taiwan
- Tata Chemicals Ltd - India
- Thiess Contractors Indonesia
- PNOC Exploration Corporation - Philippines
- PetroVietnam Power Coal Import and Supply Company
- Jorong Barutama Greston.PT - Indonesia
- Australian Coal Association
- Cement Manufacturers Association - India
- Siam City Cement PLC, Thailand
- Kepco SPC Power Corporation, Philippines
- Directorate General of MIneral and Coal - Indonesia
- Toyota Tsusho Corporation, Japan
- Barasentosa Lestari - Indonesia
- Lanco Infratech Ltd - India
- Sindya Power Generating Company Private Ltd
- Altura Mining Limited, Indonesia
- Karbindo Abesyapradhi - Indoneisa
- CNBM International Corporation - China
- Siam City Cement - Thailand
- Indo Tambangraya Megah - Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
- Posco Energy - South Korea
- Maharashtra Electricity Regulatory Commission - India
- Bulk Trading Sa - Switzerland
- Neyveli Lignite Corporation Ltd, - India
- London Commodity Brokers - England
- Petron Corporation, Philippines
- Standard Chartered Bank - UAE
- GVK Power & Infra Limited - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Vedanta Resources Plc - India
- Bukit Makmur.PT - Indonesia
- Edison Trading Spa - Italy
- Parliament of New Zealand
- Savvy Resources Ltd - HongKong
- Deloitte Consulting - India
- Kartika Selabumi Mining - Indonesia
- The Treasury - Australian Government
- AsiaOL BioFuels Corp., Philippines
- Therma Luzon, Inc, Philippines
- IEA Clean Coal Centre - UK
- Energy Development Corp, Philippines
- Petrochimia International Co. Ltd.- Taiwan
- Bhatia International Limited - India
- McConnell Dowell - Australia
- Ministry of Mines - Canada
- Aditya Birla Group - India
- Oldendorff Carriers - Singapore
- Georgia Ports Authority, United States
- Straits Asia Resources Limited - Singapore
- Madhucon Powers Ltd - India
- Coalindo Energy - Indonesia
- Global Business Power Corporation, Philippines
- Holcim Trading Pte Ltd - Singapore
- Ambuja Cements Ltd - India
- IHS Mccloskey Coal Group - USA
- Ministry of Finance - Indonesia
- Borneo Indobara - Indonesia
- Interocean Group of Companies - India
- Ceylon Electricity Board - Sri Lanka
- Salva Resources Pvt Ltd - India
- European Bulk Services B.V. - Netherlands
- Bahari Cakrawala Sebuku - Indonesia
- Alfred C Toepfer International GmbH - Germany
- White Energy Company Limited
- Chettinad Cement Corporation Ltd - India
- Latin American Coal - Colombia
- Eastern Coal Council - USA
- Malabar Cements Ltd - India
- Uttam Galva Steels Limited - India
- Kumho Petrochemical, South Korea
- Orica Australia Pty. Ltd.
- Iligan Light & Power Inc, Philippines
- Singapore Mercantile Exchange
- Global Green Power PLC Corporation, Philippines
- Ministry of Transport, Egypt
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Meralco Power Generation, Philippines
- Merrill Lynch Commodities Europe
- PowerSource Philippines DevCo
- Kideco Jaya Agung - Indonesia
- Sakthi Sugars Limited - India
- Tamil Nadu electricity Board
- Central Java Power - Indonesia
- Attock Cement Pakistan Limited
- Eastern Energy - Thailand
- Larsen & Toubro Limited - India
- TeaM Sual Corporation - Philippines
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- The University of Queensland
- Gujarat Sidhee Cement - India
- GMR Energy Limited - India
- Kohat Cement Company Ltd. - Pakistan
- Bhoruka Overseas - Indonesia
- Aboitiz Power Corporation - Philippines
- Mercuria Energy - Indonesia
- Orica Mining Services - Indonesia
- Coastal Gujarat Power Limited - India
- Ind-Barath Power Infra Limited - India
- Meenaskhi Energy Private Limited - India
- Vijayanagar Sugar Pvt Ltd - India
- Billiton Holdings Pty Ltd - Australia
- Metalloyd Limited - United Kingdom
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Mjunction Services Limited - India
- CIMB Investment Bank - Malaysia
- Star Paper Mills Limited - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Sarangani Energy Corporation, Philippines
- Sinarmas Energy and Mining - Indonesia
- SMC Global Power, Philippines
- Baramulti Group, Indonesia
- Semirara Mining Corp, Philippines
- Miang Besar Coal Terminal - Indonesia
- Indogreen Group - Indonesia
- Rashtriya Ispat Nigam Limited - India
- Banpu Public Company Limited - Thailand
- Vizag Seaport Private Limited - India
- International Coal Ventures Pvt Ltd - India
- OPG Power Generation Pvt Ltd - India
- San Jose City I Power Corp, Philippines
- Sical Logistics Limited - India
- Chamber of Mines of South Africa
- Timah Investasi Mineral - Indoneisa
- Energy Link Ltd, New Zealand
- Coal and Oil Company - UAE
- Independent Power Producers Association of India
- Electricity Authority, New Zealand
- Riau Bara Harum - Indonesia
- Manunggal Multi Energi - Indonesia
- The State Trading Corporation of India Ltd
- Kaltim Prima Coal - Indonesia
- India Bulls Power Limited - India
- Mintek Dendrill Indonesia
- Cigading International Bulk Terminal - Indonesia
- Australian Commodity Traders Exchange
- Directorate Of Revenue Intelligence - India
- Economic Council, Georgia
- Africa Commodities Group - South Africa
- Commonwealth Bank - Australia
- Parry Sugars Refinery, India
- Bhushan Steel Limited - India
- Indian Oil Corporation Limited
- Krishnapatnam Port Company Ltd. - India
- Indian Energy Exchange, India
- Maheswari Brothers Coal Limited - India
- Intertek Mineral Services - Indonesia
- Rio Tinto Coal - Australia
- Simpson Spence & Young - Indonesia
- Essar Steel Hazira Ltd - India
- Kapuas Tunggal Persada - Indonesia
- Global Coal Blending Company Limited - Australia
- Carbofer General Trading SA - India
- Xindia Steels Limited - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Globalindo Alam Lestari - Indonesia
- Antam Resourcindo - Indonesia
- Heidelberg Cement - Germany
- Sojitz Corporation - Japan
- Kobexindo Tractors - Indoneisa
- LBH Netherlands Bv - Netherlands
- Indika Energy - Indonesia
- Asmin Koalindo Tuhup - Indonesia
- SN Aboitiz Power Inc, Philippines
- GN Power Mariveles Coal Plant, Philippines
- Gujarat Mineral Development Corp Ltd - India
- Trasteel International SA, Italy
- Karaikal Port Pvt Ltd - India
- Agrawal Coal Company - India
- Romanian Commodities Exchange
- Renaissance Capital - South Africa
- Bank of Tokyo Mitsubishi UFJ Ltd
- GAC Shipping (India) Pvt Ltd
- Sree Jayajothi Cements Limited - India
- Indonesian Coal Mining Association
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