Asia Q4 2012
Asia has become the dominant global mining player over the last decade, with China, India, Australia and Indonesia becoming global leaders in mineral production. We expect this trend to continue as major companies such as Rio Tinto and BHP Billiton invest billions into Australia and state-owned companies develop in China and India. We forecast Indonesia to become a regional hub for mining production as domestic companies develop the country's tin, nickel and coal reserves, three sectors where we forecast strong growth. However, all this is against a backdrop of increasing government intervention in the mining sector with export bans in Indonesia and higher taxes in Australia, as well as the prohibitive regulatory environment in India and restrictions on foreign investment into China.
While Indonesia and Australia lead the region in our mining business environment ratings thanks to their mineral wealth and stable investor climate, the rest of Asia, with the notable exception of Malaysia, is hampered by security issues and nationalistic concerns towards mining investment. This is most notable in India and the Philippines, where bureaucracy and red tape slow development and the threat of insecurity remains high. A second theme we have observed in the region is increasing concerns towards the environment, which has resulted in more government intervention, a trend seen around much of the world. In China, environmental concerns have partly prompted the government to restructure and consolidate its massive mining industry, especially the iron ore, coal and rare earths sectors.
Australia: Investment Unperturbed By Higher Taxes
Australia remains at the top of our business environment ratings as the country has the rare combination of substantial mineral reserves, enormous growth opportunities and a positive investor climate. Australia is a world leader in coal, iron ore, lead, zinc and gold production and we expect the country's share of global output in these metals to rise over the coming years as a result of several significant expansion plans.
In line with one of the themes we have highlighted in the global mining sector recently, the government has introduced a carbon taxation scheme and a 30% superprofits tax on coal and iron ore mining companies. While these measures will add to the costs for mining companies, we do not expect these taxes to deter investment into Australia's mining sector. A number of new coal and iron ore projects have been announced since the tax was first proposed in mid-2010. We forecast that the carbon tax will only marginally increase costs for mining companies and given the elevation in metal prices, it remains highly profitable to invest in projects despite the increased taxes.
Despite recent weakness in iron ore prices, BHP and Rio Tinto are proceeding with their billion dollar projects to expand iron ore production capacity. Rio is investing more than US$15bn over the next five years to expand their Pilbara operations by 50% to 333mntpa (mn tonnes per annum) by 2015. BHP plans to develop five more mines to increase its production to 350mntpa. With production costs around US$40/tonne, both companies have significant margins which are unlikely to be threatened as we expect prices to remain elevated by historic standards.
Malaysia: Gold Sector An Avenue For Growth
Compared to other countries in the region, Malaysia provides the most attractive mining legislative environment for foreign investors. This is in part due to the fact that investment has bypassed the country in the recent commodity boom. The government's response is an attractive investment environment (100% foreign ownership, tax holidays, centralised license granting, low levies, no import duties, among other) aimed at taking away mining investment flows from South East Asian favorite Indonesia.
More than a century of tin mining has exhausted the country's reserves and made mining the remaining reserves prohibitively expensive and do not expect significant growth from this sector. We see Malaysia's gold mining industry as the next driver of growth. Gold production in Malaysia has surged in recent years owing to a number of significant finds and production ramp-ups in the country's existing mines.
Indonesia: Potentially Asia's Next Big Thing
Indonesia is set for rapid growth in its mining industry as the country continues to attract investment in coal, nickel and tin sectors. Indonesia's coal mining industry is looking especially bright with its proximity to China and with the country being the world's largest thermal coal exporter. So far in 2012, companies from industries as diverse as truck manufacturing, information technology, and oil production have expressed interest in diversifying into coal mining.
The government is on a charm offensive to increase investment in the sector and is in the process of changing investor laws. Recent changes include allowing underground mining in protected forests, revised laws to increase the value of the country's natural resource exports, decentralising mining concessions to local governments and clamping down on illegal mining. The government showed its commitment to improving the country's investor climate when it refused to backtrack on plans despite protests by local communities, which are angry at the environmental damage caused by mining activities. However, the government is looking to implement export restrictions on unrefined metals and ensure all mining activity in the country is at least 51% local-owned.
|Regulation Holding Asia Back|
|Regional Risk/Reward Ratings|
China: Energy Saving Measures To Consolidate Sector
After the breakneck speed of the last decade, we expect growth in China's mining sector to moderate over the coming years. Despite slowing down, we still forecast China to be the key driver of global growth in copper, gold, coal and iron ore output. The main theme in China's mining sector is industry-wide energy efficiency and consolidation measures as part of the country's 12th Five-Year Plan (2011-2015) to boost efficiency and increase productivity across the industry.
We expect these consolidation measures to result in the closure of inefficient smaller mines and lead to the development of the country's largest operations. We expect China's aggressive exploration efforts to continue to pay off, with reports in 2011 indicating that it plans to spend US$4.5bn during 2011-2015 on mineral exploration as domestic demand for key minerals and metals such as iron ore and gold continues to outstrip supply. We continue to caution that China's risk ratings could take a hit on the back of increasing government intervention and regulation. Most recently, an energy tax was imposed on eight energy-intensive industries, including the iron and steel and aluminium sectors. Additional taxes include a resource tax implemented on coking, non-coking, and rare earth metal sales and a tax on tin and iron ore production implemented in February 2012.
Philippines: Security Issues Prevalent, But Great Long-Term Potential
The Philippines is near the bottom of our regional business environment ratings, dragged down by poor infrastructure, a lack of political stability and a high level of corruption. The country's security problems have also significantly hampered the development of its mining sector. In particular, escalating threats from the New People's Army and the Moro Islamic Liberation Front remain a significant concern (see 'Security Risks Illustrate Investor Problems', BMO Online, October 10 2011).
Over the long term, however, we highlight that the Philippines' mining sector still has massive growth potential given the country's relatively untapped mineral resources and ongoing regulatory improvements. If the regulatory reform continues, this could help improve the Philippines' business environment. Several major projects in the pipeline have the potential to significantly boost mining production in the long term and over recent years the Philippines has been a major driver in global growth of nickel, copper and gold.
India: Bureaucracy Hinders Potential
India's ratings continue to be detrimentally affected by bureaucratic and security concerns. Land and environmental disputes continue to delay projects, while disagreements between the mining and environment ministries damage confidence in the country's business environment. Despite the Supreme Court already lifting the ban on iron ore exports, the iron ore producing region of Karnataka has still not resumed iron ore exports due to political fallouts and red tape. Security concerns in north-eastern provinces remain as Maoist rebels continue to threaten mining activities and rail networks, although the government has reportedly stepped up its offensive against them. Corruption scandals in the country have also brought down India's country risk score.
We believe that the government will continue to struggle to achieve its goal of significantly increasing foreign investment in the mining sector unless the bureaucratic obstacles are reduced. This outlook is in line with our view that India's poor operating environment will be a major hindrance to growth in the coming years despite the attractive prospects presented by the underdeveloped mining sector.
The cabinet-approved Mines and Minerals Development and Regulation(MMDR) Act of 2011, which needs parliamentary approval, seeks to address these issues by making foreign investments into India and the system of mining licences easier. However, the MMDR Act of 2011 calls for additional taxes that can be a strain on investments into key commodities such as coal and iron ore, which India is already in short supply of.