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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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Wednesday, 19 September 12
CHURCHILL STRENGTHENS LITIGATION TEAM WITH APPOINTMENT OF NICHOLAS SMITH AS MANAGING DIRECTOR
COALspot.com - Churchill Mining PLC (AIM: CHL) has announced that, Mr Nicholas Smith has joined the board of the Company and has been appointed as t ...
Wednesday, 19 September 12
DRY BULK TERMINALS SINGAPORE
Press Release - Dry bulk terminals are used all around the world to handle large quantities of bulk materials, like minerals, grains, etc. In today& ...
Tuesday, 18 September 12
JORC CODE REVISION - EXPOSURE DRAFT RELEASED FOR COMMENT
COALspot.com - The Australasian Joint Ore Reserves Committee (JORC) has today released for public comment the exposure draft of the JORC Code (2012) ...
Monday, 17 September 12
YEAR TO DATE, BUMA PRODUCED 231.1 MILLION BCM OF OVERBURDEN
COALspot.com - PT. Delta Dunia Makmur Tbk has removed 31.5 million bcm (+6.0 percent YoY) overburden in August 2012 totaled 31.5 million bcm ( ...
Sunday, 16 September 12
GLOBAL LOW DEMAND ; INDONESIA COAL AND CFR SOUTH CHINA COAL SWAPS DIP
COALspot.com - Sub-Bit Indonesia coal swaps (FOB ) for November 2012 delivery lost 1.345 percent W-O-W on Friday, 14 September 2012, closing but gai ...
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- Ministry of Mines - Canada
- Thai Mozambique Logistica
- Petron Corporation, Philippines
- Sojitz Corporation - Japan
- Indo Tambangraya Megah - Indonesia
- VISA Power Limited - India
- New Zealand Coal & Carbon
- Uttam Galva Steels Limited - India
- Bahari Cakrawala Sebuku - Indonesia
- Anglo American - United Kingdom
- Rashtriya Ispat Nigam Limited - India
- Sindya Power Generating Company Private Ltd
- Cement Manufacturers Association - India
- Malabar Cements Ltd - India
- Larsen & Toubro Limited - India
- The University of Queensland
- Aditya Birla Group - India
- International Coal Ventures Pvt Ltd - India
- Parry Sugars Refinery, India
- Indika Energy - Indonesia
- Chamber of Mines of South Africa
- Videocon Industries ltd - India
- Kartika Selabumi Mining - Indonesia
- Therma Luzon, Inc, Philippines
- Price Waterhouse Coopers - Russia
- Ministry of Finance - Indonesia
- GVK Power & Infra Limited - India
- Global Coal Blending Company Limited - Australia
- Mjunction Services Limited - India
- Star Paper Mills Limited - India
- Indian Energy Exchange, India
- Binh Thuan Hamico - Vietnam
- Petrochimia International Co. Ltd.- Taiwan
- Sarangani Energy Corporation, Philippines
- GN Power Mariveles Coal Plant, Philippines
- Parliament of New Zealand
- Romanian Commodities Exchange
- Kalimantan Lumbung Energi - Indonesia
- Kapuas Tunggal Persada - Indonesia
- Indonesian Coal Mining Association
- Kohat Cement Company Ltd. - Pakistan
- Billiton Holdings Pty Ltd - Australia
- OPG Power Generation Pvt Ltd - India
- Tata Chemicals Ltd - India
- Trasteel International SA, Italy
- Semirara Mining Corp, Philippines
- European Bulk Services B.V. - Netherlands
- Wood Mackenzie - Singapore
- Simpson Spence & Young - Indonesia
- Toyota Tsusho Corporation, Japan
- SMC Global Power, Philippines
- Ministry of Transport, Egypt
- Makarim & Taira - Indonesia
- PowerSource Philippines DevCo
- Formosa Plastics Group - Taiwan
- Neyveli Lignite Corporation Ltd, - India
- Kepco SPC Power Corporation, Philippines
- Latin American Coal - Colombia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Vijayanagar Sugar Pvt Ltd - India
- Port Waratah Coal Services - Australia
- Eastern Energy - Thailand
- Alfred C Toepfer International GmbH - Germany
- Heidelberg Cement - Germany
- Jaiprakash Power Ventures ltd
- Global Business Power Corporation, Philippines
- Mintek Dendrill Indonesia
- Asmin Koalindo Tuhup - Indonesia
- Wilmar Investment Holdings
- Global Green Power PLC Corporation, Philippines
- Riau Bara Harum - Indonesia
- Meenaskhi Energy Private Limited - India
- Leighton Contractors Pty Ltd - Australia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Thiess Contractors Indonesia
- Kaltim Prima Coal - Indonesia
- Pendopo Energi Batubara - Indonesia
- Ambuja Cements Ltd - India
- Bhoruka Overseas - Indonesia
- Goldman Sachs - Singapore
- Ceylon Electricity Board - Sri Lanka
- Borneo Indobara - Indonesia
- Sinarmas Energy and Mining - Indonesia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Marubeni Corporation - India
- Sakthi Sugars Limited - India
- Xindia Steels Limited - India
- Independent Power Producers Association of India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Coastal Gujarat Power Limited - India
- Intertek Mineral Services - Indonesia
- PNOC Exploration Corporation - Philippines
- Samtan Co., Ltd - South Korea
- Bukit Makmur.PT - Indonesia
- Standard Chartered Bank - UAE
- Medco Energi Mining Internasional
- Power Finance Corporation Ltd., India
- Cigading International Bulk Terminal - Indonesia
- SN Aboitiz Power Inc, Philippines
- Barasentosa Lestari - Indonesia
- Edison Trading Spa - Italy
- Directorate General of MIneral and Coal - Indonesia
- Manunggal Multi Energi - Indonesia
- Aboitiz Power Corporation - Philippines
- Straits Asia Resources Limited - Singapore
- Banpu Public Company Limited - Thailand
- McConnell Dowell - Australia
- Central Java Power - Indonesia
- Ind-Barath Power Infra Limited - India
- Indogreen Group - Indonesia
- Altura Mining Limited, Indonesia
- Jindal Steel & Power Ltd - India
- South Luzon Thermal Energy Corporation
- SMG Consultants - Indonesia
- IEA Clean Coal Centre - UK
- Sree Jayajothi Cements Limited - India
- Central Electricity Authority - India
- Africa Commodities Group - South Africa
- Planning Commission, India
- Renaissance Capital - South Africa
- Semirara Mining and Power Corporation, Philippines
- Tamil Nadu electricity Board
- Iligan Light & Power Inc, Philippines
- CIMB Investment Bank - Malaysia
- Timah Investasi Mineral - Indoneisa
- Holcim Trading Pte Ltd - Singapore
- Orica Australia Pty. Ltd.
- IHS Mccloskey Coal Group - USA
- Grasim Industreis Ltd - India
- Bukit Baiduri Energy - Indonesia
- Gujarat Sidhee Cement - India
- Agrawal Coal Company - India
- Economic Council, Georgia
- Baramulti Group, Indonesia
- CNBM International Corporation - China
- Bhatia International Limited - India
- London Commodity Brokers - England
- Meralco Power Generation, Philippines
- San Jose City I Power Corp, Philippines
- Mercator Lines Limited - India
- Eastern Coal Council - USA
- Pipit Mutiara Jaya. PT, Indonesia
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- The Treasury - Australian Government
- MS Steel International - UAE
- Bangladesh Power Developement Board
- LBH Netherlands Bv - Netherlands
- Directorate Of Revenue Intelligence - India
- Bukit Asam (Persero) Tbk - Indonesia
- Kobexindo Tractors - Indoneisa
- Siam City Cement - Thailand
- Maheswari Brothers Coal Limited - India
- Kumho Petrochemical, South Korea
- Krishnapatnam Port Company Ltd. - India
- AsiaOL BioFuels Corp., Philippines
- The State Trading Corporation of India Ltd
- Coal and Oil Company - UAE
- Globalindo Alam Lestari - Indonesia
- Merrill Lynch Commodities Europe
- Maharashtra Electricity Regulatory Commission - India
- Metalloyd Limited - United Kingdom
- Minerals Council of Australia
- TNB Fuel Sdn Bhd - Malaysia
- Attock Cement Pakistan Limited
- Siam City Cement PLC, Thailand
- Singapore Mercantile Exchange
- Indian Oil Corporation Limited
- TeaM Sual Corporation - Philippines
- Vizag Seaport Private Limited - India
- Deloitte Consulting - India
- Carbofer General Trading SA - India
- GMR Energy Limited - India
- Energy Link Ltd, New Zealand
- Jorong Barutama Greston.PT - Indonesia
- Kideco Jaya Agung - Indonesia
- India Bulls Power Limited - India
- Orica Mining Services - Indonesia
- Savvy Resources Ltd - HongKong
- Bayan Resources Tbk. - Indonesia
- Electricity Generating Authority of Thailand
- Oldendorff Carriers - Singapore
- Antam Resourcindo - Indonesia
- Australian Coal Association
- Posco Energy - South Korea
- Gujarat Electricity Regulatory Commission - India
- Vedanta Resources Plc - India
- ICICI Bank Limited - India
- Energy Development Corp, Philippines
- PTC India Limited - India
- Lanco Infratech Ltd - India
- Electricity Authority, New Zealand
- Australian Commodity Traders Exchange
- White Energy Company Limited
- Sical Logistics Limited - India
- Gujarat Mineral Development Corp Ltd - India
- Miang Besar Coal Terminal - Indonesia
- Bank of Tokyo Mitsubishi UFJ Ltd
- Madhucon Powers Ltd - India
- Coalindo Energy - Indonesia
- Chettinad Cement Corporation Ltd - India
- Karaikal Port Pvt Ltd - India
- PetroVietnam Power Coal Import and Supply Company
- Bulk Trading Sa - Switzerland
- Essar Steel Hazira Ltd - India
- ASAPP Information Group - India
- Dalmia Cement Bharat India
- Bharathi Cement Corporation - India
- GAC Shipping (India) Pvt Ltd
- Mercuria Energy - Indonesia
- Salva Resources Pvt Ltd - India
- Bhushan Steel Limited - India
- Georgia Ports Authority, United States
- Rio Tinto Coal - Australia
- Interocean Group of Companies - India
- Karbindo Abesyapradhi - Indoneisa
- Commonwealth Bank - Australia
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