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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, 16 September 12
THE FREIGHT RATES FROM INDONESIA TO INDIA EXPECTED TO BE STEADY - VISTAAR
COALspot.com - The freight market was mixed with most indices closing positive except for the Panamax index.
The main sentiment seems to be ...
Saturday, 15 September 12
FINANCE MINISTRY OPPOSES TAX INCENTIVE PLAN FOR COAL MINERS - JP
The Jakarta Post reported that, the Finance Ministry has turned down the idea of providing a fiscal incentive to the country’s coal mining ind ...
Friday, 14 September 12
DRY BULK MARKET LOOKS TOWARDS CHINA FOR SOME POSITIVE NEWS - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING
With the dry bulk market freight rates submerged underwater for a large part of the year, dry bulk owners are looking for some positive enhancement ...
Friday, 14 September 12
GOVT OFFERS CONDITIONAL TAX HOLIDAY TO AILING COAL MINERS - JP
The Jakarta Post, one of the leading English news paper in Indonesia reported that, acknowledging difficulties encountered by coal miners due to a p ...
Thursday, 13 September 12
PANAMAX: THE NEGATIVE TREND, POOR SENTIMENT CONTINUES - FEARNLEYS AS
Handy
Lack of cargoes and a growing list of available ships is causing rates to slip for all Atlantic trades.
The only trade keeping somewhat s ...
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- Gujarat Mineral Development Corp Ltd - India
- Eastern Coal Council - USA
- Kepco SPC Power Corporation, Philippines
- Australian Commodity Traders Exchange
- Siam City Cement PLC, Thailand
- Cement Manufacturers Association - India
- India Bulls Power Limited - India
- SMG Consultants - Indonesia
- AsiaOL BioFuels Corp., Philippines
- Directorate Of Revenue Intelligence - India
- South Luzon Thermal Energy Corporation
- International Coal Ventures Pvt Ltd - India
- Jaiprakash Power Ventures ltd
- European Bulk Services B.V. - Netherlands
- Interocean Group of Companies - India
- Attock Cement Pakistan Limited
- The State Trading Corporation of India Ltd
- PTC India Limited - India
- Sical Logistics Limited - India
- Indonesian Coal Mining Association
- Tata Chemicals Ltd - India
- Asmin Koalindo Tuhup - Indonesia
- Coal and Oil Company - UAE
- Global Business Power Corporation, Philippines
- Vedanta Resources Plc - India
- Indian Oil Corporation Limited
- Rio Tinto Coal - Australia
- Ambuja Cements Ltd - India
- Ministry of Finance - Indonesia
- IEA Clean Coal Centre - UK
- Orica Australia Pty. Ltd.
- Mjunction Services Limited - India
- Iligan Light & Power Inc, Philippines
- Sakthi Sugars Limited - India
- McConnell Dowell - Australia
- Holcim Trading Pte Ltd - Singapore
- Central Java Power - Indonesia
- Australian Coal Association
- Madhucon Powers Ltd - India
- Semirara Mining and Power Corporation, Philippines
- Bhoruka Overseas - Indonesia
- Port Waratah Coal Services - Australia
- Cigading International Bulk Terminal - Indonesia
- Gujarat Sidhee Cement - India
- Petrochimia International Co. Ltd.- Taiwan
- VISA Power Limited - India
- Ind-Barath Power Infra Limited - India
- Posco Energy - South Korea
- Kobexindo Tractors - Indoneisa
- Chettinad Cement Corporation Ltd - India
- Sojitz Corporation - Japan
- Sree Jayajothi Cements Limited - India
- Pipit Mutiara Jaya. PT, Indonesia
- Salva Resources Pvt Ltd - India
- Straits Asia Resources Limited - Singapore
- Tamil Nadu electricity Board
- Bangladesh Power Developement Board
- CIMB Investment Bank - Malaysia
- Neyveli Lignite Corporation Ltd, - India
- Wilmar Investment Holdings
- TeaM Sual Corporation - Philippines
- Global Green Power PLC Corporation, Philippines
- Lanco Infratech Ltd - India
- Makarim & Taira - Indonesia
- Medco Energi Mining Internasional
- Coastal Gujarat Power Limited - India
- Antam Resourcindo - Indonesia
- Electricity Authority, New Zealand
- Leighton Contractors Pty Ltd - Australia
- Krishnapatnam Port Company Ltd. - India
- The University of Queensland
- GVK Power & Infra Limited - India
- Trasteel International SA, Italy
- SMC Global Power, Philippines
- Kapuas Tunggal Persada - Indonesia
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Ceylon Electricity Board - Sri Lanka
- Bayan Resources Tbk. - Indonesia
- Indika Energy - Indonesia
- OPG Power Generation Pvt Ltd - India
- Edison Trading Spa - Italy
- Manunggal Multi Energi - Indonesia
- GMR Energy Limited - India
- PNOC Exploration Corporation - Philippines
- Sinarmas Energy and Mining - Indonesia
- Independent Power Producers Association of India
- Kalimantan Lumbung Energi - Indonesia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Riau Bara Harum - Indonesia
- Parry Sugars Refinery, India
- MS Steel International - UAE
- Georgia Ports Authority, United States
- Goldman Sachs - Singapore
- CNBM International Corporation - China
- PowerSource Philippines DevCo
- Formosa Plastics Group - Taiwan
- Alfred C Toepfer International GmbH - Germany
- Sarangani Energy Corporation, Philippines
- Petron Corporation, Philippines
- Karbindo Abesyapradhi - Indoneisa
- Gujarat Electricity Regulatory Commission - India
- Kohat Cement Company Ltd. - Pakistan
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Merrill Lynch Commodities Europe
- Orica Mining Services - Indonesia
- Romanian Commodities Exchange
- Xindia Steels Limited - India
- Malabar Cements Ltd - India
- Barasentosa Lestari - Indonesia
- Billiton Holdings Pty Ltd - Australia
- Commonwealth Bank - Australia
- Aboitiz Power Corporation - Philippines
- Mercuria Energy - Indonesia
- Semirara Mining Corp, Philippines
- Kartika Selabumi Mining - Indonesia
- Bukit Baiduri Energy - Indonesia
- The Treasury - Australian Government
- New Zealand Coal & Carbon
- Oldendorff Carriers - Singapore
- Latin American Coal - Colombia
- Energy Development Corp, Philippines
- Sindya Power Generating Company Private Ltd
- Borneo Indobara - Indonesia
- Globalindo Alam Lestari - Indonesia
- Offshore Bulk Terminal Pte Ltd, Singapore
- PetroVietnam Power Coal Import and Supply Company
- Global Coal Blending Company Limited - Australia
- Minerals Council of Australia
- Meenaskhi Energy Private Limited - India
- Uttam Galva Steels Limited - India
- SN Aboitiz Power Inc, Philippines
- Renaissance Capital - South Africa
- Thiess Contractors Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- GN Power Mariveles Coal Plant, Philippines
- Maheswari Brothers Coal Limited - India
- Electricity Generating Authority of Thailand
- Intertek Mineral Services - Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- Bukit Asam (Persero) Tbk - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- Bukit Makmur.PT - Indonesia
- Binh Thuan Hamico - Vietnam
- Meralco Power Generation, Philippines
- Jindal Steel & Power Ltd - India
- Central Electricity Authority - India
- Grasim Industreis Ltd - India
- Marubeni Corporation - India
- Simpson Spence & Young - Indonesia
- Bulk Trading Sa - Switzerland
- ICICI Bank Limited - India
- Altura Mining Limited, Indonesia
- Mercator Lines Limited - India
- Deloitte Consulting - India
- Savvy Resources Ltd - HongKong
- Banpu Public Company Limited - Thailand
- Energy Link Ltd, New Zealand
- Eastern Energy - Thailand
- Videocon Industries ltd - India
- Coalindo Energy - Indonesia
- Dalmia Cement Bharat India
- Timah Investasi Mineral - Indoneisa
- Price Waterhouse Coopers - Russia
- Samtan Co., Ltd - South Korea
- TNB Fuel Sdn Bhd - Malaysia
- San Jose City I Power Corp, Philippines
- Carbofer General Trading SA - India
- Singapore Mercantile Exchange
- Miang Besar Coal Terminal - Indonesia
- Vizag Seaport Private Limited - India
- Planning Commission, India
- Star Paper Mills Limited - India
- Toyota Tsusho Corporation, Japan
- Kumho Petrochemical, South Korea
- Rashtriya Ispat Nigam Limited - India
- ASAPP Information Group - India
- LBH Netherlands Bv - Netherlands
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Metalloyd Limited - United Kingdom
- Aditya Birla Group - India
- Bhushan Steel Limited - India
- Heidelberg Cement - Germany
- Pendopo Energi Batubara - Indonesia
- Jorong Barutama Greston.PT - Indonesia
- GAC Shipping (India) Pvt Ltd
- Indo Tambangraya Megah - Indonesia
- Anglo American - United Kingdom
- Chamber of Mines of South Africa
- Karaikal Port Pvt Ltd - India
- Standard Chartered Bank - UAE
- Kaltim Prima Coal - Indonesia
- Africa Commodities Group - South Africa
- Siam City Cement - Thailand
- White Energy Company Limited
- Ministry of Mines - Canada
- Bank of Tokyo Mitsubishi UFJ Ltd
- Larsen & Toubro Limited - India
- Bharathi Cement Corporation - India
- Wood Mackenzie - Singapore
- Baramulti Group, Indonesia
- Indogreen Group - Indonesia
- Parliament of New Zealand
- Kideco Jaya Agung - Indonesia
- London Commodity Brokers - England
- Economic Council, Georgia
- Therma Luzon, Inc, Philippines
- IHS Mccloskey Coal Group - USA
- Agrawal Coal Company - India
- Bahari Cakrawala Sebuku - Indonesia
- Mintek Dendrill Indonesia
- Ministry of Transport, Egypt
- Maharashtra Electricity Regulatory Commission - India
- Essar Steel Hazira Ltd - India
- Power Finance Corporation Ltd., India
- Bhatia International Limited - India
- Thai Mozambique Logistica
- Indian Energy Exchange, India
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