Boom Not Near Despite Positive Reforms


BMI View: A resource boom in Vietnam is unlikely to materialise anytime soon despite the ongoing reforms in the mining space. Frontier mining will lose attraction as c ost-cutting becomes the key lever for miners to better brace the current mining downturn. However , Vietnam's coal sector could potentially be one bright spot in an otherwise mediocre outlook for the country's mining industry.

We believe a resource boom in Vietnam is unlikely to materialise anytime soon despite the ongoing reforms in the mining space. In a bid to improve the business climate and attract mining investment, Vietnam has pledged to participate in the Extractive Industries Transparency Initiative (EITI) in 2015. Developed and overseen by a coalition of governments and organisations, EITI is an international standard introduced to enhance transparency in the oil, gas and mineral resources industries, and ensure that the wealth from these resources will trickle down to the benefit of the local population.

Foreign Interests Growing...

The government of Vietnam has been actively embarking on reforms to stimulate capital flows into the mining sector over recent years. Notably, a new mining law was enacted in July 2011 to take a tougher stance on illegal mining and provides for longer exploration licenses. Against the backdrop of an improving operating environment, a growing number of foreign investors are entering Vietnam for investment. In August, Japan's Kobe Steel received official approval from the Vietnamese government for a stake in the country's largest iron ore mine at Thach Khe, which would provide the company with raw materials for its US$1bn iron nugget facility in Nghe An. Indian steelmaker Tata Steel had earlier expressed an interest to invest in the Thach Khe mine, but has yet to receive an approval.

...But Resource Boom Not Near

While the string of positive developments in Vietnam's mining sector is certainly a step in the right direction for many investors, we believe a raft of challenges will continue to stand in the way of a mining boom. Crucially, the significant pullback in mining expenditure over the past quarters has forced us to moderate our outlook on frontier mining.

Cut, Trim, Slash
Select Companies - Mining Capex (% chg y-o-y)

Underpinned by our view that mineral prices will continue to trend lower with the economic slowdown in China, we expect frontier mining to become increasingly less attractive over the coming quarters. Cost-cutting will be the key lever for miners to better brace the current mining downturn. Countries such as Vietnam, Myanmar and the Philippines are likely to suffer the brunt from austerity in the mining industry as miners across the board exhibit a clear distaste for greenfield projects. Indeed, frontier markets are often beset by poor infrastructure, lack of power supply and high level s of corruption. According to Transparency International's 2012 Corruption Perceptions Index, Vie tnam is in the bottom half of global transparency , ra nking 123 out of 176 countries.

Coal To Prove More Resilient
Select Commodities - Thermal Coal & Iron Ore Prices (US$/tonne)

Coal Sector On Better Footing

That said, Vietnam's coal sector could potentially be one bright spot in an otherwise mediocre outlook for the country's mining industry. In contrast to our downbeat view on industrial metals, we believe thermal coal prices will find a firmer footing on the back of continued demand from Asia, particularly China and India ( see 'Thermal Coal To Average US$91/tonne In 2014', August 20 ). Encouragingly, Vietnam could ink a larger presence in the seaborne market over the coming years as state-owned coal miner Vinacomin undertakes further plans to upgrade and expand current production. Vinacomin operates most of the coal mines in Vietnam, where the bulk of coal reserves are concentrated in the northern area of Quang Ninh province and the Red River Delta Basin. The miner has a production capacity of around 40-45 mn tonnes per annum (mntpa) and exports 25% of its total output.

This article is tagged to:
Sector: Mining
Geography: Vietnam