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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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Sunday, 23 September 12
INDIA IMPORTED 11.40 PERCENT MORE INDONESIAN COAL IN AUGUST
COALspot.com: Indonesia, the world largest multi grade coal exporter, shipped 26,451,565* tons of coal in August 2012, compared to 27.88* mill ...
Saturday, 22 September 12
SOFT BUNKER PRICES KEEP INDONESIA TO INDIA FREIGHTS STABLE - VISTAAR
COALspot.com - The freight market overall remained buoyant with all indices up except for Panamax index. The main effect seems to be increased shipm ...
Friday, 21 September 12
SHIP BREAKING ACTIVITY REACHES NEW RECORDS, AS ALREADY 2012 LEVELS HAVE SURPASSED THE WHOLE OF 2011 - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING
The vast oversupply of vessels, most notably in the dry bulk shipping sector, has forced ship owners to intensify their efforts towards recycling th ...
Thursday, 20 September 12
SUPRAMAX : INDO-INDIA ROUNDS WERE AROUND USD 12K - FEARNLEYS
Handy
Not a bad week for Supramax tonnage, if we compare Supramax developments to the bigger size tonnage. The rates have basically remained unchan ...
Thursday, 20 September 12
DRY BULK INCHES FORWARD AFTER WEEKS OF BELOW PAR PERFORMANCE - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING
The dry bulk market has started to revive from its ashed, as the past couple of days, traders have reported an increased activity from China, result ...
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- Commonwealth Bank - Australia
- Port Waratah Coal Services - Australia
- Siam City Cement PLC, Thailand
- Medco Energi Mining Internasional
- Central Java Power - Indonesia
- Coal and Oil Company - UAE
- Bharathi Cement Corporation - India
- Maharashtra Electricity Regulatory Commission - India
- Georgia Ports Authority, United States
- Jaiprakash Power Ventures ltd
- PetroVietnam Power Coal Import and Supply Company
- Parliament of New Zealand
- Bayan Resources Tbk. - Indonesia
- Globalindo Alam Lestari - Indonesia
- TeaM Sual Corporation - Philippines
- Bhoruka Overseas - Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
- Deloitte Consulting - India
- Malabar Cements Ltd - India
- Australian Commodity Traders Exchange
- Anglo American - United Kingdom
- Cement Manufacturers Association - India
- Kumho Petrochemical, South Korea
- Simpson Spence & Young - Indonesia
- Banpu Public Company Limited - Thailand
- CIMB Investment Bank - Malaysia
- Manunggal Multi Energi - Indonesia
- LBH Netherlands Bv - Netherlands
- Dalmia Cement Bharat India
- Savvy Resources Ltd - HongKong
- Ministry of Mines - Canada
- Maheswari Brothers Coal Limited - India
- Star Paper Mills Limited - India
- Orica Mining Services - Indonesia
- Africa Commodities Group - South Africa
- Directorate General of MIneral and Coal - Indonesia
- GMR Energy Limited - India
- Semirara Mining and Power Corporation, Philippines
- New Zealand Coal & Carbon
- Offshore Bulk Terminal Pte Ltd, Singapore
- Aboitiz Power Corporation - Philippines
- Rio Tinto Coal - Australia
- Rashtriya Ispat Nigam Limited - India
- Chamber of Mines of South Africa
- Sojitz Corporation - Japan
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Bukit Makmur.PT - Indonesia
- IHS Mccloskey Coal Group - USA
- Indian Oil Corporation Limited
- Marubeni Corporation - India
- Agrawal Coal Company - India
- Attock Cement Pakistan Limited
- Indo Tambangraya Megah - Indonesia
- VISA Power Limited - India
- Electricity Authority, New Zealand
- Vizag Seaport Private Limited - India
- Merrill Lynch Commodities Europe
- London Commodity Brokers - England
- Eastern Coal Council - USA
- Tamil Nadu electricity Board
- Iligan Light & Power Inc, Philippines
- ICICI Bank Limited - India
- Madhucon Powers Ltd - India
- Uttam Galva Steels Limited - India
- The State Trading Corporation of India Ltd
- Sarangani Energy Corporation, Philippines
- Thiess Contractors Indonesia
- Videocon Industries ltd - India
- Ceylon Electricity Board - Sri Lanka
- Renaissance Capital - South Africa
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Antam Resourcindo - Indonesia
- Kepco SPC Power Corporation, Philippines
- Global Green Power PLC Corporation, Philippines
- Kapuas Tunggal Persada - Indonesia
- Standard Chartered Bank - UAE
- Energy Development Corp, Philippines
- Price Waterhouse Coopers - Russia
- Mintek Dendrill Indonesia
- TNB Fuel Sdn Bhd - Malaysia
- Billiton Holdings Pty Ltd - Australia
- Siam City Cement - Thailand
- Economic Council, Georgia
- The Treasury - Australian Government
- Bhushan Steel Limited - India
- Meralco Power Generation, Philippines
- Kalimantan Lumbung Energi - Indonesia
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Metalloyd Limited - United Kingdom
- McConnell Dowell - Australia
- Petron Corporation, Philippines
- GVK Power & Infra Limited - India
- Independent Power Producers Association of India
- India Bulls Power Limited - India
- Riau Bara Harum - Indonesia
- European Bulk Services B.V. - Netherlands
- Carbofer General Trading SA - India
- Chettinad Cement Corporation Ltd - India
- Jindal Steel & Power Ltd - India
- Wilmar Investment Holdings
- Vedanta Resources Plc - India
- Petrochimia International Co. Ltd.- Taiwan
- Trasteel International SA, Italy
- Barasentosa Lestari - Indonesia
- Global Coal Blending Company Limited - Australia
- Mercuria Energy - Indonesia
- Global Business Power Corporation, Philippines
- Indonesian Coal Mining Association
- Tata Chemicals Ltd - India
- Oldendorff Carriers - Singapore
- Sree Jayajothi Cements Limited - India
- IEA Clean Coal Centre - UK
- Jorong Barutama Greston.PT - Indonesia
- Coalindo Energy - Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- The University of Queensland
- Lanco Infratech Ltd - India
- Wood Mackenzie - Singapore
- Minerals Council of Australia
- SMC Global Power, Philippines
- Larsen & Toubro Limited - India
- Ministry of Transport, Egypt
- Edison Trading Spa - Italy
- Parry Sugars Refinery, India
- Binh Thuan Hamico - Vietnam
- Alfred C Toepfer International GmbH - Germany
- Orica Australia Pty. Ltd.
- PowerSource Philippines DevCo
- International Coal Ventures Pvt Ltd - India
- MS Steel International - UAE
- Neyveli Lignite Corporation Ltd, - India
- Karaikal Port Pvt Ltd - India
- Romanian Commodities Exchange
- Sakthi Sugars Limited - India
- Baramulti Group, Indonesia
- Power Finance Corporation Ltd., India
- Bhatia International Limited - India
- Straits Asia Resources Limited - Singapore
- Bangladesh Power Developement Board
- Timah Investasi Mineral - Indoneisa
- Bahari Cakrawala Sebuku - Indonesia
- Heidelberg Cement - Germany
- Krishnapatnam Port Company Ltd. - India
- Eastern Energy - Thailand
- Kideco Jaya Agung - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Intertek Mineral Services - Indonesia
- Cigading International Bulk Terminal - Indonesia
- Sinarmas Energy and Mining - Indonesia
- Asmin Koalindo Tuhup - Indonesia
- Ambuja Cements Ltd - India
- Mercator Lines Limited - India
- Kohat Cement Company Ltd. - Pakistan
- Bukit Baiduri Energy - Indonesia
- Kaltim Prima Coal - Indonesia
- Thai Mozambique Logistica
- Posco Energy - South Korea
- GN Power Mariveles Coal Plant, Philippines
- Kartika Selabumi Mining - Indonesia
- Goldman Sachs - Singapore
- Therma Luzon, Inc, Philippines
- PTC India Limited - India
- AsiaOL BioFuels Corp., Philippines
- Energy Link Ltd, New Zealand
- Indogreen Group - Indonesia
- Coastal Gujarat Power Limited - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Formosa Plastics Group - Taiwan
- Semirara Mining Corp, Philippines
- Singapore Mercantile Exchange
- San Jose City I Power Corp, Philippines
- Planning Commission, India
- Samtan Co., Ltd - South Korea
- Ind-Barath Power Infra Limited - India
- Toyota Tsusho Corporation, Japan
- OPG Power Generation Pvt Ltd - India
- South Luzon Thermal Energy Corporation
- Grasim Industreis Ltd - India
- Salva Resources Pvt Ltd - India
- Aditya Birla Group - India
- Sical Logistics Limited - India
- Australian Coal Association
- Latin American Coal - Colombia
- Bank of Tokyo Mitsubishi UFJ Ltd
- CNBM International Corporation - China
- Borneo Indobara - Indonesia
- Xindia Steels Limited - India
- Miang Besar Coal Terminal - Indonesia
- Directorate Of Revenue Intelligence - India
- Interocean Group of Companies - India
- Indian Energy Exchange, India
- Bukit Asam (Persero) Tbk - Indonesia
- Altura Mining Limited, Indonesia
- Gujarat Mineral Development Corp Ltd - India
- SMG Consultants - Indonesia
- ASAPP Information Group - India
- Makarim & Taira - Indonesia
- PNOC Exploration Corporation - Philippines
- Meenaskhi Energy Private Limited - India
- Karbindo Abesyapradhi - Indoneisa
- Central Electricity Authority - India
- Essar Steel Hazira Ltd - India
- Bulk Trading Sa - Switzerland
- Mjunction Services Limited - India
- Leighton Contractors Pty Ltd - Australia
- Indika Energy - Indonesia
- Gujarat Electricity Regulatory Commission - India
- Gujarat Sidhee Cement - India
- White Energy Company Limited
- Holcim Trading Pte Ltd - Singapore
- Electricity Generating Authority of Thailand
- Sindya Power Generating Company Private Ltd
- Pendopo Energi Batubara - Indonesia
- Kobexindo Tractors - Indoneisa
- SN Aboitiz Power Inc, Philippines
- Ministry of Finance - Indonesia
- GAC Shipping (India) Pvt Ltd
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