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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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Thursday, 22 November 12
DRY BULK MARKET RISE, BUT OUTLOOK SEEN DIM ON THE BACK OF RECORD NEW BUILDING DELIVERIES - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING NEWS
The dry bulk market has been under hefty pressure since the start of the year, as a result of record newbuilding deliveries and below-par demand for ...
Wednesday, 21 November 12
LITTLE IMPACT FROM DISSOLUTION OF BP MIGAS ON INDONESIAN OIL & GAS COMPANIES - FITCH
Fitch Ratings has said that the recent court order to abolish the Indonesian upstream oil and gas regulator, BP Migas, has minimal immediate impact ...
Wednesday, 21 November 12
ORPHEUS ENERGY SECURES FIRST COAL OFF TAKE CONTRACT
COALspot.com - Orpheus Energy Limited (ASX:OEG) has announced that it has signed a coal sales contract with an Indonesian steel manufacturing compan ...
Tuesday, 20 November 12
AUSTRALIAN NEWCASTLE PORT HAS LOADED 13.18 PERCENT LESS COAL W-W
COALspot.com - Newcastle port in Australia has loaded 2,691,731 MT of thermal and coking coal for week ended 0700 hours 19 November 2012, Newc ...
Monday, 19 November 12
GOVT PREPARES TO FACE ANOTHER SUIT ON MINING LAW - THE JAKARTA POST
The government is gearing up to face a complaint on the 2009 Mining Law prepared by the same organization that previously brought down upstream oil ...
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- IHS Mccloskey Coal Group - USA
- Makarim & Taira - Indonesia
- Bukit Baiduri Energy - Indonesia
- Carbofer General Trading SA - India
- Sojitz Corporation - Japan
- Baramulti Group, Indonesia
- Merrill Lynch Commodities Europe
- Petron Corporation, Philippines
- TNB Fuel Sdn Bhd - Malaysia
- Jaiprakash Power Ventures ltd
- Gujarat Mineral Development Corp Ltd - India
- Madhucon Powers Ltd - India
- Intertek Mineral Services - Indonesia
- Vizag Seaport Private Limited - India
- Economic Council, Georgia
- VISA Power Limited - India
- Krishnapatnam Port Company Ltd. - India
- Mercuria Energy - Indonesia
- Thai Mozambique Logistica
- Gujarat Electricity Regulatory Commission - India
- McConnell Dowell - Australia
- Wilmar Investment Holdings
- Iligan Light & Power Inc, Philippines
- Directorate General of MIneral and Coal - Indonesia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Borneo Indobara - Indonesia
- White Energy Company Limited
- CIMB Investment Bank - Malaysia
- Semirara Mining and Power Corporation, Philippines
- Banpu Public Company Limited - Thailand
- Kohat Cement Company Ltd. - Pakistan
- Bharathi Cement Corporation - India
- GMR Energy Limited - India
- Maharashtra Electricity Regulatory Commission - India
- Jindal Steel & Power Ltd - India
- Savvy Resources Ltd - HongKong
- Malabar Cements Ltd - India
- Petrochimia International Co. Ltd.- Taiwan
- Sinarmas Energy and Mining - Indonesia
- Goldman Sachs - Singapore
- Ministry of Transport, Egypt
- Indogreen Group - Indonesia
- CNBM International Corporation - China
- Independent Power Producers Association of India
- Romanian Commodities Exchange
- London Commodity Brokers - England
- Minerals Council of Australia
- PTC India Limited - India
- Singapore Mercantile Exchange
- Global Business Power Corporation, Philippines
- Parry Sugars Refinery, India
- Mjunction Services Limited - India
- Ceylon Electricity Board - Sri Lanka
- Vedanta Resources Plc - India
- Bhoruka Overseas - Indonesia
- Simpson Spence & Young - Indonesia
- Bayan Resources Tbk. - Indonesia
- Ministry of Finance - Indonesia
- SMC Global Power, Philippines
- Kapuas Tunggal Persada - Indonesia
- Electricity Authority, New Zealand
- Price Waterhouse Coopers - Russia
- Billiton Holdings Pty Ltd - Australia
- Kaltim Prima Coal - Indonesia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Aboitiz Power Corporation - Philippines
- Power Finance Corporation Ltd., India
- MS Steel International - UAE
- Altura Mining Limited, Indonesia
- Kideco Jaya Agung - Indonesia
- Anglo American - United Kingdom
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- GVK Power & Infra Limited - India
- Kumho Petrochemical, South Korea
- India Bulls Power Limited - India
- Siam City Cement PLC, Thailand
- Meralco Power Generation, Philippines
- Orica Mining Services - Indonesia
- Alfred C Toepfer International GmbH - Germany
- Bukit Asam (Persero) Tbk - Indonesia
- SN Aboitiz Power Inc, Philippines
- Coastal Gujarat Power Limited - India
- Port Waratah Coal Services - Australia
- PowerSource Philippines DevCo
- Latin American Coal - Colombia
- Bank of Tokyo Mitsubishi UFJ Ltd
- Cement Manufacturers Association - India
- Samtan Co., Ltd - South Korea
- Pendopo Energi Batubara - Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- Manunggal Multi Energi - Indonesia
- Dalmia Cement Bharat India
- Australian Commodity Traders Exchange
- Renaissance Capital - South Africa
- Formosa Plastics Group - Taiwan
- Deloitte Consulting - India
- Ind-Barath Power Infra Limited - India
- Attock Cement Pakistan Limited
- Central Java Power - Indonesia
- Indo Tambangraya Megah - Indonesia
- GN Power Mariveles Coal Plant, Philippines
- The Treasury - Australian Government
- Bhushan Steel Limited - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Grasim Industreis Ltd - India
- Karaikal Port Pvt Ltd - India
- ICICI Bank Limited - India
- Mintek Dendrill Indonesia
- Globalindo Alam Lestari - Indonesia
- Sical Logistics Limited - India
- Heidelberg Cement - Germany
- Directorate Of Revenue Intelligence - India
- Energy Link Ltd, New Zealand
- Georgia Ports Authority, United States
- Global Coal Blending Company Limited - Australia
- Therma Luzon, Inc, Philippines
- Bangladesh Power Developement Board
- Commonwealth Bank - Australia
- Meenaskhi Energy Private Limited - India
- PNOC Exploration Corporation - Philippines
- Agrawal Coal Company - India
- OPG Power Generation Pvt Ltd - India
- Cigading International Bulk Terminal - Indonesia
- Indonesian Coal Mining Association
- Medco Energi Mining Internasional
- Star Paper Mills Limited - India
- Gujarat Sidhee Cement - India
- Sarangani Energy Corporation, Philippines
- Asmin Koalindo Tuhup - Indonesia
- ASAPP Information Group - India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Sree Jayajothi Cements Limited - India
- Chettinad Cement Corporation Ltd - India
- Lanco Infratech Ltd - India
- Tata Chemicals Ltd - India
- European Bulk Services B.V. - Netherlands
- Riau Bara Harum - Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
- Aditya Birla Group - India
- PetroVietnam Power Coal Import and Supply Company
- Neyveli Lignite Corporation Ltd, - India
- Global Green Power PLC Corporation, Philippines
- Oldendorff Carriers - Singapore
- Karbindo Abesyapradhi - Indoneisa
- Trasteel International SA, Italy
- International Coal Ventures Pvt Ltd - India
- Leighton Contractors Pty Ltd - Australia
- Standard Chartered Bank - UAE
- Timah Investasi Mineral - Indoneisa
- Rashtriya Ispat Nigam Limited - India
- Africa Commodities Group - South Africa
- Holcim Trading Pte Ltd - Singapore
- Indian Oil Corporation Limited
- Larsen & Toubro Limited - India
- Kalimantan Lumbung Energi - Indonesia
- Metalloyd Limited - United Kingdom
- SMG Consultants - Indonesia
- San Jose City I Power Corp, Philippines
- Xindia Steels Limited - India
- Videocon Industries ltd - India
- Mercator Lines Limited - India
- South Luzon Thermal Energy Corporation
- LBH Netherlands Bv - Netherlands
- AsiaOL BioFuels Corp., Philippines
- Bulk Trading Sa - Switzerland
- Siam City Cement - Thailand
- Kepco SPC Power Corporation, Philippines
- Essar Steel Hazira Ltd - India
- Coalindo Energy - Indonesia
- Kobexindo Tractors - Indoneisa
- Wood Mackenzie - Singapore
- Bukit Makmur.PT - Indonesia
- Interocean Group of Companies - India
- Tamil Nadu electricity Board
- Sindya Power Generating Company Private Ltd
- Edison Trading Spa - Italy
- Posco Energy - South Korea
- Electricity Generating Authority of Thailand
- Uttam Galva Steels Limited - India
- Central Electricity Authority - India
- Miang Besar Coal Terminal - Indonesia
- Ambuja Cements Ltd - India
- TeaM Sual Corporation - Philippines
- Antam Resourcindo - Indonesia
- Thiess Contractors Indonesia
- Indika Energy - Indonesia
- The State Trading Corporation of India Ltd
- Energy Development Corp, Philippines
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Planning Commission, India
- Eastern Coal Council - USA
- The University of Queensland
- Parliament of New Zealand
- Coal and Oil Company - UAE
- Toyota Tsusho Corporation, Japan
- Eastern Energy - Thailand
- Bahari Cakrawala Sebuku - Indonesia
- New Zealand Coal & Carbon
- Ministry of Mines - Canada
- Barasentosa Lestari - Indonesia
- Semirara Mining Corp, Philippines
- Bhatia International Limited - India
- IEA Clean Coal Centre - UK
- Straits Asia Resources Limited - Singapore
- Maheswari Brothers Coal Limited - India
- Orica Australia Pty. Ltd.
- Rio Tinto Coal - Australia
- Marubeni Corporation - India
- Indian Energy Exchange, India
- Salva Resources Pvt Ltd - India
- Jorong Barutama Greston.PT - Indonesia
- Australian Coal Association
- Binh Thuan Hamico - Vietnam
- Sakthi Sugars Limited - India
- Kartika Selabumi Mining - Indonesia
- Chamber of Mines of South Africa
- GAC Shipping (India) Pvt Ltd
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