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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, 27 September 12
MINING RE-COMMENCES AT ORPHEUS' B2 EAST KALIMANTAN COAL PROJECT
- B2 project overburden removal completed and coal exposed
- Coal getting has commenced with target production of 30,000tpm
- Orpheus to re ...
Thursday, 27 September 12
HANDY: THE PACIFIC MARKET IS GETTING WEAKER WITH UPCOMING GOLDEN WEEK HOLIDAYS - FEARNLEYS AS
Handy
Yet another week with rates softening in all trades. Especially owners with ships open Continent struggle to find employment paying decent mo ...
Thursday, 27 September 12
DRY BULK MARKET LOSES STEAM - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING
The rise of the BDI (Baltic Dry Index), the dry bulk industry’s benchmark during the course of the previous week, proved to be short-lived, as ...
Wednesday, 26 September 12
NEWBUILDING ORDERING ACTIVITY REMAINS SUBDUED ON GLOBAL MARKET UNCERTAINTY - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING NEWS
Newbuilding ordering activity has been on the down side during the past few weeks, a trend also noticeable during the course of the past few days, a ...
Sunday, 23 September 12
AN ANOTHER UNSTABLE WEEK FOR INDONESIAN COAL SWAPS
COALspot.com - Sub-Bit Indonesia coal swaps (FOB ) for November 2012 delivery lost 1.10 percent and 0.916 percent WOW and DOD respectively ...
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- Bukit Asam (Persero) Tbk - Indonesia
- McConnell Dowell - Australia
- New Zealand Coal & Carbon
- Jorong Barutama Greston.PT - Indonesia
- Africa Commodities Group - South Africa
- Chettinad Cement Corporation Ltd - India
- GMR Energy Limited - India
- Sakthi Sugars Limited - India
- Coastal Gujarat Power Limited - India
- Singapore Mercantile Exchange
- Wood Mackenzie - Singapore
- Eastern Coal Council - USA
- Tamil Nadu electricity Board
- Ministry of Mines - Canada
- Renaissance Capital - South Africa
- Interocean Group of Companies - India
- Rio Tinto Coal - Australia
- South Luzon Thermal Energy Corporation
- Posco Energy - South Korea
- MS Steel International - UAE
- CIMB Investment Bank - Malaysia
- Independent Power Producers Association of India
- Energy Link Ltd, New Zealand
- Leighton Contractors Pty Ltd - Australia
- Videocon Industries ltd - India
- Indian Oil Corporation Limited
- Baramulti Group, Indonesia
- Planning Commission, India
- Chamber of Mines of South Africa
- Carbofer General Trading SA - India
- Bangladesh Power Developement Board
- Mjunction Services Limited - India
- Larsen & Toubro Limited - India
- Energy Development Corp, Philippines
- Aboitiz Power Corporation - Philippines
- Siam City Cement - Thailand
- SMC Global Power, Philippines
- Bhatia International Limited - India
- Gujarat Sidhee Cement - India
- Directorate General of MIneral and Coal - Indonesia
- Sindya Power Generating Company Private Ltd
- Bhoruka Overseas - Indonesia
- Bank of Tokyo Mitsubishi UFJ Ltd
- Straits Asia Resources Limited - Singapore
- Coalindo Energy - Indonesia
- Georgia Ports Authority, United States
- Australian Coal Association
- Global Green Power PLC Corporation, Philippines
- Marubeni Corporation - India
- Simpson Spence & Young - Indonesia
- Deloitte Consulting - India
- Pendopo Energi Batubara - Indonesia
- Krishnapatnam Port Company Ltd. - India
- Riau Bara Harum - Indonesia
- Economic Council, Georgia
- Kaltim Prima Coal - Indonesia
- Vedanta Resources Plc - India
- Iligan Light & Power Inc, Philippines
- Mintek Dendrill Indonesia
- Rashtriya Ispat Nigam Limited - India
- Jaiprakash Power Ventures ltd
- CNBM International Corporation - China
- SN Aboitiz Power Inc, Philippines
- Vizag Seaport Private Limited - India
- Asmin Koalindo Tuhup - Indonesia
- Global Business Power Corporation, Philippines
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Bulk Trading Sa - Switzerland
- Malabar Cements Ltd - India
- Ambuja Cements Ltd - India
- Antam Resourcindo - Indonesia
- IEA Clean Coal Centre - UK
- PowerSource Philippines DevCo
- Xindia Steels Limited - India
- Formosa Plastics Group - Taiwan
- Oldendorff Carriers - Singapore
- SMG Consultants - Indonesia
- Savvy Resources Ltd - HongKong
- White Energy Company Limited
- Kobexindo Tractors - Indoneisa
- Offshore Bulk Terminal Pte Ltd, Singapore
- Price Waterhouse Coopers - Russia
- India Bulls Power Limited - India
- Ind-Barath Power Infra Limited - India
- Minerals Council of Australia
- Jindal Steel & Power Ltd - India
- Gujarat Mineral Development Corp Ltd - India
- AsiaOL BioFuels Corp., Philippines
- International Coal Ventures Pvt Ltd - India
- Central Electricity Authority - India
- Uttam Galva Steels Limited - India
- Aditya Birla Group - India
- Essar Steel Hazira Ltd - India
- Indian Energy Exchange, India
- Heidelberg Cement - Germany
- Miang Besar Coal Terminal - Indonesia
- The Treasury - Australian Government
- Petrochimia International Co. Ltd.- Taiwan
- Latin American Coal - Colombia
- Bukit Baiduri Energy - Indonesia
- Indogreen Group - Indonesia
- Dalmia Cement Bharat India
- Central Java Power - Indonesia
- Bhushan Steel Limited - India
- Ministry of Finance - Indonesia
- Billiton Holdings Pty Ltd - Australia
- Orica Mining Services - Indonesia
- Goldman Sachs - Singapore
- Indo Tambangraya Megah - Indonesia
- Bahari Cakrawala Sebuku - Indonesia
- Bayan Resources Tbk. - Indonesia
- Bharathi Cement Corporation - India
- Sinarmas Energy and Mining - Indonesia
- Timah Investasi Mineral - Indoneisa
- Karaikal Port Pvt Ltd - India
- Madhucon Powers Ltd - India
- Toyota Tsusho Corporation, Japan
- Samtan Co., Ltd - South Korea
- PetroVietnam Power Coal Import and Supply Company
- Petron Corporation, Philippines
- Mercuria Energy - Indonesia
- Parry Sugars Refinery, India
- Eastern Energy - Thailand
- Sree Jayajothi Cements Limited - India
- Orica Australia Pty. Ltd.
- Wilmar Investment Holdings
- Alfred C Toepfer International GmbH - Germany
- Kumho Petrochemical, South Korea
- Global Coal Blending Company Limited - Australia
- Grasim Industreis Ltd - India
- ASAPP Information Group - India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Star Paper Mills Limited - India
- Lanco Infratech Ltd - India
- Thai Mozambique Logistica
- Parliament of New Zealand
- Therma Luzon, Inc, Philippines
- Globalindo Alam Lestari - Indonesia
- GN Power Mariveles Coal Plant, Philippines
- Pipit Mutiara Jaya. PT, Indonesia
- Electricity Authority, New Zealand
- Edison Trading Spa - Italy
- Maharashtra Electricity Regulatory Commission - India
- Metalloyd Limited - United Kingdom
- Port Waratah Coal Services - Australia
- Karbindo Abesyapradhi - Indoneisa
- Bukit Makmur.PT - Indonesia
- Coal and Oil Company - UAE
- Kartika Selabumi Mining - Indonesia
- Kapuas Tunggal Persada - Indonesia
- Cement Manufacturers Association - India
- Altura Mining Limited, Indonesia
- The State Trading Corporation of India Ltd
- Banpu Public Company Limited - Thailand
- The University of Queensland
- Electricity Generating Authority of Thailand
- Trasteel International SA, Italy
- European Bulk Services B.V. - Netherlands
- Romanian Commodities Exchange
- Kohat Cement Company Ltd. - Pakistan
- VISA Power Limited - India
- Meralco Power Generation, Philippines
- Kideco Jaya Agung - Indonesia
- Holcim Trading Pte Ltd - Singapore
- GVK Power & Infra Limited - India
- Anglo American - United Kingdom
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Ceylon Electricity Board - Sri Lanka
- Maheswari Brothers Coal Limited - India
- Attock Cement Pakistan Limited
- Semirara Mining Corp, Philippines
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Tata Chemicals Ltd - India
- Medco Energi Mining Internasional
- Indonesian Coal Mining Association
- Commonwealth Bank - Australia
- London Commodity Brokers - England
- Directorate Of Revenue Intelligence - India
- Semirara Mining and Power Corporation, Philippines
- Siam City Cement PLC, Thailand
- San Jose City I Power Corp, Philippines
- Indika Energy - Indonesia
- Sarangani Energy Corporation, Philippines
- Merrill Lynch Commodities Europe
- Neyveli Lignite Corporation Ltd, - India
- IHS Mccloskey Coal Group - USA
- Intertek Mineral Services - Indonesia
- Cigading International Bulk Terminal - Indonesia
- TeaM Sual Corporation - Philippines
- GAC Shipping (India) Pvt Ltd
- Ministry of Transport, Egypt
- TNB Fuel Sdn Bhd - Malaysia
- Vijayanagar Sugar Pvt Ltd - India
- Kalimantan Lumbung Energi - Indonesia
- Agrawal Coal Company - India
- Salva Resources Pvt Ltd - India
- PTC India Limited - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Power Finance Corporation Ltd., India
- LBH Netherlands Bv - Netherlands
- Gujarat Electricity Regulatory Commission - India
- Meenaskhi Energy Private Limited - India
- Standard Chartered Bank - UAE
- OPG Power Generation Pvt Ltd - India
- Makarim & Taira - Indonesia
- Thiess Contractors Indonesia
- Barasentosa Lestari - Indonesia
- Kepco SPC Power Corporation, Philippines
- ICICI Bank Limited - India
- Binh Thuan Hamico - Vietnam
- Sical Logistics Limited - India
- Manunggal Multi Energi - Indonesia
- PNOC Exploration Corporation - Philippines
- Australian Commodity Traders Exchange
- Borneo Indobara - Indonesia
- Mercator Lines Limited - India
- Sojitz Corporation - Japan
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