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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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Monday, 15 October 12
IT'S STRICTLY COME CHARTERING - CLARKSON RESEARCH SERVICES
The charter market is a bit of a dance between ship owner and charterer: one leader, one follower; one step, two steps, turn... The dance is symbiot ...
Sunday, 14 October 12
SUB-BIT INDONESIA COAL AND CFR SOUTH CHINA COAL SWAPS: SOFT
COALspot.com - Sub-Bit Indonesia coal swaps (FOB ) for December 2012 delivery lost 0.329 percent w- w but gained 0.248 percent d-d on Friday, 12 Oct ...
Sunday, 14 October 12
SUPRAMAX FREIGHT STEADY: PANAMAX FREIGHTS FIRM - VISTAAR
COALspot.com - The shipping market saw some hectic activity in the Cape and panamax sector and quite a lot of fixtures reported.
The BDI was up b ...
Friday, 12 October 12
HOW REAL IS THE THREAT OF PIRACY? - BIMCO
The threat of modern piracy remains serious, regardless of its seasonal variations and the fact that it is chiefly confined to the Indian Ocean, Gul ...
Friday, 12 October 12
INVESTMENT OPPORTUNITIES OCCUR IN THE SECOND HAND VESSEL MARKETS - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING
Although 2012 has by now evolved into one of the most challenging years for global shipping industry, ship owners are scouting the second hand ship ...
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- Bangladesh Power Developement Board
- Simpson Spence & Young - Indonesia
- San Jose City I Power Corp, Philippines
- Economic Council, Georgia
- Miang Besar Coal Terminal - Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- Sindya Power Generating Company Private Ltd
- Altura Mining Limited, Indonesia
- Malabar Cements Ltd - India
- Aboitiz Power Corporation - Philippines
- GAC Shipping (India) Pvt Ltd
- Carbofer General Trading SA - India
- Australian Coal Association
- Ceylon Electricity Board - Sri Lanka
- Karaikal Port Pvt Ltd - India
- Latin American Coal - Colombia
- Singapore Mercantile Exchange
- Karbindo Abesyapradhi - Indoneisa
- Alfred C Toepfer International GmbH - Germany
- International Coal Ventures Pvt Ltd - India
- Indogreen Group - Indonesia
- Formosa Plastics Group - Taiwan
- Pendopo Energi Batubara - Indonesia
- Maheswari Brothers Coal Limited - India
- Dalmia Cement Bharat India
- Power Finance Corporation Ltd., India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Indonesian Coal Mining Association
- Gujarat Electricity Regulatory Commission - India
- Intertek Mineral Services - Indonesia
- Orica Mining Services - Indonesia
- Globalindo Alam Lestari - Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
- Ambuja Cements Ltd - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Eastern Energy - Thailand
- Parliament of New Zealand
- Merrill Lynch Commodities Europe
- Global Coal Blending Company Limited - Australia
- Edison Trading Spa - Italy
- Indo Tambangraya Megah - Indonesia
- Billiton Holdings Pty Ltd - Australia
- Vizag Seaport Private Limited - India
- Kartika Selabumi Mining - Indonesia
- White Energy Company Limited
- Georgia Ports Authority, United States
- Bukit Asam (Persero) Tbk - Indonesia
- Global Green Power PLC Corporation, Philippines
- Chamber of Mines of South Africa
- Bharathi Cement Corporation - India
- Eastern Coal Council - USA
- Ministry of Transport, Egypt
- Semirara Mining and Power Corporation, Philippines
- Timah Investasi Mineral - Indoneisa
- AsiaOL BioFuels Corp., Philippines
- SMC Global Power, Philippines
- Borneo Indobara - Indonesia
- ASAPP Information Group - India
- Leighton Contractors Pty Ltd - Australia
- Energy Development Corp, Philippines
- OPG Power Generation Pvt Ltd - India
- Medco Energi Mining Internasional
- Binh Thuan Hamico - Vietnam
- Marubeni Corporation - India
- Sree Jayajothi Cements Limited - India
- Bukit Makmur.PT - Indonesia
- Indian Oil Corporation Limited
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Independent Power Producers Association of India
- Commonwealth Bank - Australia
- Madhucon Powers Ltd - India
- MS Steel International - UAE
- Toyota Tsusho Corporation, Japan
- Trasteel International SA, Italy
- Goldman Sachs - Singapore
- Kaltim Prima Coal - Indonesia
- Kohat Cement Company Ltd. - Pakistan
- Samtan Co., Ltd - South Korea
- Wilmar Investment Holdings
- Renaissance Capital - South Africa
- Metalloyd Limited - United Kingdom
- Australian Commodity Traders Exchange
- Star Paper Mills Limited - India
- PowerSource Philippines DevCo
- Kepco SPC Power Corporation, Philippines
- Siam City Cement PLC, Thailand
- Gujarat Mineral Development Corp Ltd - India
- Cement Manufacturers Association - India
- Vedanta Resources Plc - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Kapuas Tunggal Persada - Indonesia
- Coal and Oil Company - UAE
- GVK Power & Infra Limited - India
- Bayan Resources Tbk. - Indonesia
- Kalimantan Lumbung Energi - Indonesia
- South Luzon Thermal Energy Corporation
- Jorong Barutama Greston.PT - Indonesia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Banpu Public Company Limited - Thailand
- Coalindo Energy - Indonesia
- The University of Queensland
- Thai Mozambique Logistica
- Directorate Of Revenue Intelligence - India
- Bhoruka Overseas - Indonesia
- Grasim Industreis Ltd - India
- Meenaskhi Energy Private Limited - India
- Ind-Barath Power Infra Limited - India
- Indika Energy - Indonesia
- Salva Resources Pvt Ltd - India
- Energy Link Ltd, New Zealand
- Gujarat Sidhee Cement - India
- Bhushan Steel Limited - India
- Cigading International Bulk Terminal - Indonesia
- Port Waratah Coal Services - Australia
- Romanian Commodities Exchange
- Kideco Jaya Agung - Indonesia
- Petron Corporation, Philippines
- Mjunction Services Limited - India
- Central Java Power - Indonesia
- Antam Resourcindo - Indonesia
- Mercator Lines Limited - India
- Barasentosa Lestari - Indonesia
- Riau Bara Harum - Indonesia
- Oldendorff Carriers - Singapore
- Essar Steel Hazira Ltd - India
- Sakthi Sugars Limited - India
- European Bulk Services B.V. - Netherlands
- GMR Energy Limited - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Mintek Dendrill Indonesia
- Asmin Koalindo Tuhup - Indonesia
- India Bulls Power Limited - India
- IHS Mccloskey Coal Group - USA
- Agrawal Coal Company - India
- Bhatia International Limited - India
- Parry Sugars Refinery, India
- Iligan Light & Power Inc, Philippines
- Attock Cement Pakistan Limited
- Meralco Power Generation, Philippines
- Tata Chemicals Ltd - India
- Africa Commodities Group - South Africa
- Bank of Tokyo Mitsubishi UFJ Ltd
- Sinarmas Energy and Mining - Indonesia
- Kumho Petrochemical, South Korea
- CNBM International Corporation - China
- Planning Commission, India
- Orica Australia Pty. Ltd.
- Makarim & Taira - Indonesia
- Lanco Infratech Ltd - India
- Petrochimia International Co. Ltd.- Taiwan
- ICICI Bank Limited - India
- Bukit Baiduri Energy - Indonesia
- Price Waterhouse Coopers - Russia
- Manunggal Multi Energi - Indonesia
- Baramulti Group, Indonesia
- Ministry of Finance - Indonesia
- VISA Power Limited - India
- Sarangani Energy Corporation, Philippines
- Rashtriya Ispat Nigam Limited - India
- Electricity Generating Authority of Thailand
- Rio Tinto Coal - Australia
- Semirara Mining Corp, Philippines
- IEA Clean Coal Centre - UK
- Sical Logistics Limited - India
- Maharashtra Electricity Regulatory Commission - India
- Thiess Contractors Indonesia
- Uttam Galva Steels Limited - India
- Xindia Steels Limited - India
- Neyveli Lignite Corporation Ltd, - India
- Minerals Council of Australia
- SMG Consultants - Indonesia
- GN Power Mariveles Coal Plant, Philippines
- Videocon Industries ltd - India
- Heidelberg Cement - Germany
- Kobexindo Tractors - Indoneisa
- Krishnapatnam Port Company Ltd. - India
- Ministry of Mines - Canada
- Deloitte Consulting - India
- London Commodity Brokers - England
- Bulk Trading Sa - Switzerland
- LBH Netherlands Bv - Netherlands
- CIMB Investment Bank - Malaysia
- Electricity Authority, New Zealand
- TeaM Sual Corporation - Philippines
- The State Trading Corporation of India Ltd
- Sojitz Corporation - Japan
- Posco Energy - South Korea
- Anglo American - United Kingdom
- Savvy Resources Ltd - HongKong
- Aditya Birla Group - India
- SN Aboitiz Power Inc, Philippines
- Central Electricity Authority - India
- Directorate General of MIneral and Coal - Indonesia
- Interocean Group of Companies - India
- PTC India Limited - India
- TNB Fuel Sdn Bhd - Malaysia
- Jaiprakash Power Ventures ltd
- Bahari Cakrawala Sebuku - Indonesia
- Straits Asia Resources Limited - Singapore
- Siam City Cement - Thailand
- New Zealand Coal & Carbon
- McConnell Dowell - Australia
- Tamil Nadu electricity Board
- Chettinad Cement Corporation Ltd - India
- Wood Mackenzie - Singapore
- Jindal Steel & Power Ltd - India
- PetroVietnam Power Coal Import and Supply Company
- Coastal Gujarat Power Limited - India
- Mercuria Energy - Indonesia
- Global Business Power Corporation, Philippines
- Larsen & Toubro Limited - India
- The Treasury - Australian Government
- Therma Luzon, Inc, Philippines
- Indian Energy Exchange, India
- PNOC Exploration Corporation - Philippines
- Standard Chartered Bank - UAE
- Holcim Trading Pte Ltd - Singapore
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