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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, 23 October 12
INDONESIA SETS DMO FOR NEXT YEAR
COALspot.com - The Indonesian government has declared the quantity of coal to be supplied to domestic market in 2013 recently under DMO regulation. ...
Sunday, 21 October 12
BUMA HAS PRODUCED 25.0 MILLION TONS OF COAL YEAR TO DATE
COALspot.com - PT Delta Dunia Makmur Tbk., has removed 33.2 million bcm* (+5.5% YoY) of Overburden in September 2012 totaled while coal produc ...
Saturday, 20 October 12
SUPRAMAX FREIGHT EXPECTED TO BE FLAT - VISTAAR
COALspot.com - The shipping market continued to be quite active with quite lot of cargoes fixed for in the cape and panamax sector.
The BDI was ...
Thursday, 18 October 12
INDO-INDIA, LARGE ECO SUPRA FIXED AT USD 11000 - FEARNLEYS AS
Handy
Atlantic market remains quiet due to lack of cargoes and more supply of ships. Rates from Cont to East Med were around USD 14k and Black Sea ...
Tuesday, 16 October 12
DRY BULK FREIGHT RATES COULD IMPROVE ON CHINESE STIMULUS AND WINTER CARGO DEMAND SAYS BIMCO - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING NEWS
BIMCO has given out its forecast for the next six weeks, in terms of freight rates for dry bulk carriers. According to them, Capesize TC Average rat ...
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- Pendopo Energi Batubara - Indonesia
- Latin American Coal - Colombia
- Price Waterhouse Coopers - Russia
- Grasim Industreis Ltd - India
- Ministry of Mines - Canada
- Carbofer General Trading SA - India
- Jindal Steel & Power Ltd - India
- Commonwealth Bank - Australia
- Wood Mackenzie - Singapore
- Lanco Infratech Ltd - India
- Economic Council, Georgia
- Formosa Plastics Group - Taiwan
- Maharashtra Electricity Regulatory Commission - India
- Iligan Light & Power Inc, Philippines
- Manunggal Multi Energi - Indonesia
- Timah Investasi Mineral - Indoneisa
- Bank of Tokyo Mitsubishi UFJ Ltd
- Indika Energy - Indonesia
- Eastern Coal Council - USA
- Simpson Spence & Young - Indonesia
- Aboitiz Power Corporation - Philippines
- Mercator Lines Limited - India
- The University of Queensland
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Energy Development Corp, Philippines
- Africa Commodities Group - South Africa
- AsiaOL BioFuels Corp., Philippines
- Deloitte Consulting - India
- IHS Mccloskey Coal Group - USA
- Coastal Gujarat Power Limited - India
- The State Trading Corporation of India Ltd
- Ceylon Electricity Board - Sri Lanka
- Uttam Galva Steels Limited - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Bulk Trading Sa - Switzerland
- Offshore Bulk Terminal Pte Ltd, Singapore
- Globalindo Alam Lestari - Indonesia
- Central Electricity Authority - India
- Central Java Power - Indonesia
- London Commodity Brokers - England
- Goldman Sachs - Singapore
- Medco Energi Mining Internasional
- McConnell Dowell - Australia
- Edison Trading Spa - Italy
- Rio Tinto Coal - Australia
- Savvy Resources Ltd - HongKong
- Georgia Ports Authority, United States
- Sinarmas Energy and Mining - Indonesia
- Meenaskhi Energy Private Limited - India
- Therma Luzon, Inc, Philippines
- ICICI Bank Limited - India
- VISA Power Limited - India
- Leighton Contractors Pty Ltd - Australia
- Borneo Indobara - Indonesia
- PNOC Exploration Corporation - Philippines
- Miang Besar Coal Terminal - Indonesia
- Kumho Petrochemical, South Korea
- Orica Mining Services - Indonesia
- Power Finance Corporation Ltd., India
- Makarim & Taira - Indonesia
- SN Aboitiz Power Inc, Philippines
- Madhucon Powers Ltd - India
- Indian Oil Corporation Limited
- PowerSource Philippines DevCo
- Ministry of Transport, Egypt
- Standard Chartered Bank - UAE
- New Zealand Coal & Carbon
- Banpu Public Company Limited - Thailand
- Karbindo Abesyapradhi - Indoneisa
- GAC Shipping (India) Pvt Ltd
- Agrawal Coal Company - India
- Siam City Cement - Thailand
- Port Waratah Coal Services - Australia
- Vedanta Resources Plc - India
- Tamil Nadu electricity Board
- Global Green Power PLC Corporation, Philippines
- Aditya Birla Group - India
- Petrochimia International Co. Ltd.- Taiwan
- Alfred C Toepfer International GmbH - Germany
- Ambuja Cements Ltd - India
- Altura Mining Limited, Indonesia
- Indonesian Coal Mining Association
- Riau Bara Harum - Indonesia
- Heidelberg Cement - Germany
- Meralco Power Generation, Philippines
- Global Business Power Corporation, Philippines
- Kaltim Prima Coal - Indonesia
- CNBM International Corporation - China
- OPG Power Generation Pvt Ltd - India
- Dalmia Cement Bharat India
- Xindia Steels Limited - India
- Kapuas Tunggal Persada - Indonesia
- Independent Power Producers Association of India
- Cigading International Bulk Terminal - Indonesia
- Kobexindo Tractors - Indoneisa
- Ind-Barath Power Infra Limited - India
- MS Steel International - UAE
- Electricity Generating Authority of Thailand
- Semirara Mining and Power Corporation, Philippines
- Videocon Industries ltd - India
- Coalindo Energy - Indonesia
- Eastern Energy - Thailand
- Bhushan Steel Limited - India
- Chamber of Mines of South Africa
- Planning Commission, India
- Billiton Holdings Pty Ltd - Australia
- Attock Cement Pakistan Limited
- Indogreen Group - Indonesia
- Thai Mozambique Logistica
- Romanian Commodities Exchange
- Bangladesh Power Developement Board
- International Coal Ventures Pvt Ltd - India
- Orica Australia Pty. Ltd.
- Siam City Cement PLC, Thailand
- Bharathi Cement Corporation - India
- Gujarat Mineral Development Corp Ltd - India
- Parliament of New Zealand
- Jorong Barutama Greston.PT - Indonesia
- Jaiprakash Power Ventures ltd
- Petron Corporation, Philippines
- Sarangani Energy Corporation, Philippines
- Kohat Cement Company Ltd. - Pakistan
- Rashtriya Ispat Nigam Limited - India
- Neyveli Lignite Corporation Ltd, - India
- Essar Steel Hazira Ltd - India
- TeaM Sual Corporation - Philippines
- Sakthi Sugars Limited - India
- Energy Link Ltd, New Zealand
- Intertek Mineral Services - Indonesia
- Kideco Jaya Agung - Indonesia
- Cement Manufacturers Association - India
- Singapore Mercantile Exchange
- TNB Fuel Sdn Bhd - Malaysia
- Gujarat Sidhee Cement - India
- Metalloyd Limited - United Kingdom
- Asmin Koalindo Tuhup - Indonesia
- Australian Commodity Traders Exchange
- Samtan Co., Ltd - South Korea
- Directorate General of MIneral and Coal - Indonesia
- San Jose City I Power Corp, Philippines
- Bahari Cakrawala Sebuku - Indonesia
- Marubeni Corporation - India
- Bhatia International Limited - India
- Antam Resourcindo - Indonesia
- Bukit Makmur.PT - Indonesia
- Mjunction Services Limited - India
- Parry Sugars Refinery, India
- IEA Clean Coal Centre - UK
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Bhoruka Overseas - Indonesia
- Mintek Dendrill Indonesia
- GVK Power & Infra Limited - India
- ASAPP Information Group - India
- Directorate Of Revenue Intelligence - India
- PetroVietnam Power Coal Import and Supply Company
- Posco Energy - South Korea
- The Treasury - Australian Government
- LBH Netherlands Bv - Netherlands
- Sree Jayajothi Cements Limited - India
- Anglo American - United Kingdom
- Bayan Resources Tbk. - Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- Interocean Group of Companies - India
- Salva Resources Pvt Ltd - India
- Barasentosa Lestari - Indonesia
- Baramulti Group, Indonesia
- Malabar Cements Ltd - India
- Gujarat Electricity Regulatory Commission - India
- Star Paper Mills Limited - India
- Chettinad Cement Corporation Ltd - India
- Larsen & Toubro Limited - India
- Pipit Mutiara Jaya. PT, Indonesia
- Bukit Asam (Persero) Tbk - Indonesia
- Coal and Oil Company - UAE
- SMC Global Power, Philippines
- South Luzon Thermal Energy Corporation
- Straits Asia Resources Limited - Singapore
- GN Power Mariveles Coal Plant, Philippines
- Semirara Mining Corp, Philippines
- Indian Energy Exchange, India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Sical Logistics Limited - India
- SMG Consultants - Indonesia
- Mercuria Energy - Indonesia
- Electricity Authority, New Zealand
- Tata Chemicals Ltd - India
- Vizag Seaport Private Limited - India
- Krishnapatnam Port Company Ltd. - India
- GMR Energy Limited - India
- Oldendorff Carriers - Singapore
- Thiess Contractors Indonesia
- Bukit Baiduri Energy - Indonesia
- Kartika Selabumi Mining - Indonesia
- Kalimantan Lumbung Energi - Indonesia
- Maheswari Brothers Coal Limited - India
- White Energy Company Limited
- Trasteel International SA, Italy
- Karaikal Port Pvt Ltd - India
- European Bulk Services B.V. - Netherlands
- Renaissance Capital - South Africa
- Holcim Trading Pte Ltd - Singapore
- India Bulls Power Limited - India
- Indo Tambangraya Megah - Indonesia
- Kepco SPC Power Corporation, Philippines
- Merrill Lynch Commodities Europe
- PTC India Limited - India
- Australian Coal Association
- CIMB Investment Bank - Malaysia
- Sojitz Corporation - Japan
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Wilmar Investment Holdings
- Sindya Power Generating Company Private Ltd
- Global Coal Blending Company Limited - Australia
- Minerals Council of Australia
- Binh Thuan Hamico - Vietnam
- Ministry of Finance - Indonesia
- Toyota Tsusho Corporation, Japan
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