South East Asia - A Rising Star In Asia Mining
BMI View: South East Asia will be one of the main drivers of growth in the Asian mining sector over the coming years, with countries such as Vietnam and the Philippines contin u ing to grow from a low base. While the period of sky-high commodity prices may be over, Australia will remain a dominant player as a record pipeline of projects continues to power growt h in the mining space. T he major risk to investment stems from the rising threat of resource nationalism, unforeseen policy reversal s and growing opposition to mining activities .
We believe South East Asia will be one of the main drivers of growth in the Asian mining sector over the coming years. Vietnam and the Philippines possess immense potential to become major mining economies given the sheer size of their respect ive estimated mineral reserves. We expect Australia to remain a dominant player in the mining industry , while countries such as India and China continue to undergo restructuring in their mining industries to ensure raw ma terial supply security. T he major risk to investment stems from the rising threat of resource nationalism, unforeseen policy reversals as well as growing opposition to mining activities .
Vietnam: Sitting On A Bauxite Bonanza
With an abundance of bauxite reserves estimated at 2.1bnt (billion tonnes), Vietnam has great potential to become one of the largest bauxite producers in the world. Although the mining industry remains heavily regulated and largely state-led, we believe the government's ongoing efforts to liberalise mining laws and attract foreign investment will lead to a significant increase in private sector involvement over the coming years. While deficiencies in infrastructure facilities and power supply will continue to hamper growth in the mining industry , the overall operating environment in Vietnam is set to improve considerably given blistering progress in the country's construction sector. Indeed, we remain bullish towards the long-term growth potential of Vietnam's mining industry as improvements are continually made across multiple fronts.
|Waking Up To Its Potential|
|Bauxite Reserves (bnt) By Country|
Philippines: A Soon-To-Be Investment Darling
Despite the growing threat of resource nationalism, we hold on to our conviction that the Philippines remains a bright sp ot for investment over the long term . The country boasts some of the largest gold, silver, iron, copper, platinum, and zinc reserves in the world, estimated at more than US$850b n. W e believe the gold sector will experience the strongest growth across the wider metal s complex as gold prices stay elevated by historical standards and con tinue to incentivise production. Moreover, a moderate increase in the excise tax is unlikely to significant ly deter mining investment as much of the world is enacting similar tax increases. However, we expect investment in the Philippines' mining sector to remain subdued until at least mid-2013 as the government's ongoing attempt to introduce a new mining law is creating uncertainty in the market. The Philippine government is looking to revise its tax structure on mining firms from the current rate of 2% to between 5-7%, and has imposed a ban on new mineral extraction contracts for the time being.
|A Golden Future Ahead|
|Philippines - Mining Industry Value & Growth|
Australia: Mining Boom Still Has Years To Run
Although a string of project delays and cancellations by major miners in recent months has encouraged proclamations of the end of Australian mining boom, we are generally optimistic over the future outlook of the country's mining industry. In our opinion, Australia will retain its dominance in the global mining sector as investors remain attracted to the rare combination of a very positive business environment, substantial mineral reserves and low cash costs. Based on active projects yet to be completed, we believe growth in Australia's mining sector will continue to be supported by a record pipeline of investment projects set to come online over the coming years. As the majority of this investment is in long-term projects, we forecast the increase in resource exports will continue to power growth in the country's mining sector as capacity comes on stream. Indeed, the onset of an era of low commodities prices will unlikely mark the doom of Australia's mining industry as the sector forges ahead with a portfolio of construction plans and a ramp-up in mineral exports set to take place over the coming years.
|One Of A Kind|
|Australia - Share & Rank Of Global Mining Output (2011)|
India: Mining Sector Remains In The Doldrums
India hosts a wide range of globally significant mineral resources, ranking among the world's top five nations for reserves of coal and iron ore. Despite the stellar portfolio of mineral reserves, w e cast doubts on the future prospects of the mining sector as a combination of factors, notably t he pervasiveness of corruption and bureaucratic hurdles , coalesce to present a modest growth picture at best. India's natural resource endowment is typically located in the country's northern and eastern states, which suffer from poor infrastructure, red tape roadblocks and, in many cases, a hostile security landscape due to the prevalence of Maoist insurgent groups. Despite being approved by the cabinet last year, the Mines and Minerals Development and Regulation (MMDR) Bill has yet to be put to parliament due to disagreements over issues such as the provisions of profit and royalty sharing by miners with locals and the reservation of mining areas for public sector companies. The poor legislative and regulatory environment in India has continued to dampen investment and spark off a series of mining scandals in recent months, as best exemplified by the recent US$33bn 'Coal-gate' scandal in August.
|Australia Out In Front|
|Asia - Mining Risk/Reward Ratings|
China: Industry Consolidation To Meet Near-term Resistance
After the breakneck speed of the last decade, we expect growth in China's mining sector to moderate in the years ahead as the country's rebalancing process begins in earnest. Declining ore grades, increasing regulatory restrictions and environmental obligations, coupled with the slowdown in the domestic economy will continue to inhibit production growth. China's mining sector will undergo continual restructuring as part of the 12th Five-Year Plan (2011-2015). Our expectation for base metals prices to head broadly lower over the coming quarters will provide further economic credence to the consolidation of China's metal sector. However, efforts aimed at consolidating the industry will be met with limited success over the near term. Indeed, regional governments have a strong incentive to support local production where possible in order to maintain employment and prestige. This is particularly the case given our below consensus view on China's economic growth and during the year of the once-in-a-decade leadership transition.
|Source: BMI, Company Announcements|
|Australia||Hancock Coal||Alpha||Coal: 30mntpa||2013|
|Australia||BHP Billiton||Western Australia Operations||Iron Ore: rise from 164 to 220mntpa||2014|
|India||NMDC||Donimalai||Expansion; from 4-7mntpa||By 2015|
|Australia||Rio Tinto||Pilbara||Iron Ore: expansion from 156 to 333mntpa||2015|
|China||Shenhua Group||Haerwusu province||Coal: double output to 150mntpa||2015|
|China||Yanzhou Coal||Yushuwan||Coal: 40mntpa; reserves of 1.8bnt||2015-2020|
|China||Chinese government||Xinjiang province||Coal: reserves of 1.1bnt||na|
|Vietnam||Vinacomin||Dak Nong 1-5||4.5mntpa||2015|
|Philippines||Xstrata||Tampakan||360kozpa over 17 year mine life||Pending Approval|
|Philippines||Bezant Resources||Manyakan||95.6koz gold metal over 42 year mine life||Awaiting pre-feasibility study|
|Indonesia||Churchhill Mining||East Kutai||35mntpa||2013|
|Indonesia||Bumi Resources-KPC||Sangatta||Increase production capacity from 18mntpa to 23mntpa||2013|
Indonesia: The Worst Is Probably Over
In line with our expectations, the recent changes in Indonesia's mining code have made the country a less attractive place for investment with the implementation of stricter regulations weighing on miners' profits and posing significant hurdles to project development. For one, the Indonesian government is restricting exports of unprocessed metal by imposing a 20% duty on 14 mineral ore exports, in a bid to encourage local mining companies to build their own smelting plants ahead of the 2014 export ban on unprocessed metal. That said, w e believe the worst is behind us and we do not expect further significant policy changes to take place in the near term.
|Firmly Below Consensus|
|Select Commodities - BMI 2013 Average Price Forecasts vs Bloomberg Consensus, % Difference|
While rhetoric against foreign miners could step up, especially in the run-up to the 2014 general election, we believe a moderation in the government's stance is more likely to happen owing to two reasons. First, our below consensus forecasts for base metals prices does not bode well for domestic miners in Indonesia. As such , we believe the government may reconsider measures in a period of lower prices and profits for mining sectors. Moreover, the paramount importance of the mining sector, which constitutes 12% of Indonesia's GDP, further reinforces our conviction that policies that would jeopardise growth in the mineral sector will not be implemented.
|f = BMI forecast. Source: BMI, UN Data, Australia National Statistics, National Statistics Office|
|Mining Industry Value (US$bn)|
|% change y-o-y|