Infrastructure The Key To Unlocking Mineral Wealth
BMI View: The lack of adequate infrastructure in some Asian countries will stand as a serious obstacle to further investment in the mining sector. Whilst major miners like Rio Tinto and BHP Billiton are capable of developing their own transportation facilities, infrastructure bottlenecks in many of the frontier markets will remain a parlous undertaking for smaller miners and put a lid on investment.
Whilst several frontier markets in Asia look set to experience a natural resource boom on the back of growing interests from foreign miners, we believe the key to unlocking mineral riches in these countries hinges greatly on the level of infrastructure support available to mining companies. Although major miners such as the likes of Rio Tinto and BHP Billiton possess significant financial capability to develop the required transportation facilities, a large number of small players remain heavily dependent on the host governments in alleviating the infrastructure bottlenecks that have so often stall progress in the mining space.
In view of the current state of play in Asia ' s infrastructure sector, we highlight Australia, Ind on esia and the Philippines as places that will capture some of the largest mining investment in the region . The considerable number of large-scale infrastructure projects in these countrie s will provide a firm platform for future growth in the mining industry. In contrast, a chronic shortage of infrastructure in countries such as Vietnam, India, Afghanistan and Pakistan will retard capital inflows and development in the mining sector .
Australia: Mining Boom Cools, But Still A Long-Term Growth Story
We believe progress in Australia ' s infrastructure sector will continue to increase at a hea lthy pace over the coming years as some of the largest players in the mining industry focus on their core assets and undertake plans to expand their existing projects. Indeed, tier one miners in Australia are blessed with the balance sheets and organisational capability to solely fund and develop large scale logistics assets pertinent to the continu ed growth of mining operations. To highlight, Rio Tinto is forging ahead with US$21bn in mine, port and railway expansion programmes to boost its Australian capacity. This is in spite of its goal to reduce costs by more than US$5bn over the next two years and divest more assets in an attempt to cushion against the impact of weaker commodity prices.
|Oakajee Under Threat From Higher Costs|
|Australia - Jack Hills Mining Railway Project|
Nevertheless, we do not envisage a return to the stellar infrastructure growth story that Australia has witnessed over the past few years. The huge ramp up of construction activities during the boom times have generally saturated the market and lead to overcapacity now that China has slowed and commodity prices have come off their recent highs. The recent decision by Japan-based conglomerate Mitsubishi Corporation to put the Oakajee project on hold chimes with our view that engineering construction activity in Australia is unlikely to reach new-highs over the near-term as several domestic miners scaled down or deferred their capital expenditure plans. The US$5.7bn Oakajee Deepwater port on Australia ' s Indian Ocean Coast was put on ice as a result of spiralling cash cos ts and falling iron ore prices.
Indonesia: Healthy Growth In Store As Infrastructure Takes Off
We remain generally upbeat on the future growth prospects of Indonesia ' s mining industry as the government undertakes serious efforts to combat the deep-rooted shortcomings in the infrastructure sector . Indeed, the country is on a massive drive to boost investment towards the expansion of roads and railways , with President Yudhoyono calling for close to US$200bn in infrastructure spending by 2014. According to Indonesia ' s Minister of Public Works, the central government has spent more than what was initially budgeted to upgrade 2,800 miles of road in the national network this year, up from 1,800 miles in 2011. We believe the considerable incr ease in infrastructure spending will be a major draw-card in attracting foreign investors into t he mining s ector, which is heavily reliant on having a well- knit and well-maintained network of roads, railways and port facilities for the transportation of mineral ores.
Philippines: Infrastructure Moves Up The List, A Star In The Making
The Philippines government's ongoing attempt to introduce a new mining law will see that investment is likely to re main on the backburner until at least mid-2013, when we expect President Aquino's Liberal Party and its coalition partners to retain broad control of the congress. Nevertheless, we hold on to our conviction that the country will remain a bright spot for investment over the long term. T he blistering increase in public construction investment supports our view that robust government spending would bring about real growth to Philippines ' construction sector and encourage development in the mining space.
We are generally optimistic towards the infrastructure sector due to the government's growing ability to boost infrastructure spending as well as the pertinent progress made in its Private-Public Partnership (PPP) Programme. We believe the Philippine government would continue to invest heavily in infrastructure capacity going into 2013. The government had announced in July 2012 that it has budgeted PHP404.6bn (US$9.7bn) worth of infrastructure spending for 2013, with about a third of the funds - PHP152.9bn - allocated to the Department of Public Works and Highways to build roads, bridges, ports and airports.
|Infrastructure Development To Uncover Riches|
|Philippines - Metal & Coal Mines|
Myanmar : No Room For Minors
Against the backdrop of economic and political reforms aimed at liberalising foreign direct investment, we expect Myanmar's mining sector to experi ence rapid growth and will be on the radar of many foreign investors in the years to come . Despite our expectation for industrial metals prices to head lower over 2013 and 2014, they will remain elevated by historical standards and this will continue to incentivise production and encourage miners to expand capacity. That said, we note that Myanmar's antiquated infrastructure system will stand as a serious obstacle to further investment in the resource extractive industry. Although the shortfall in minerals production will encourage Chinese state-owned companies to construct the much needed roads and railways facilities, the lack of infrastructure support will nevertheless proved to be a significant deterrent for small miners in particular. Indeed, compared with its regional peers, Myanmar's road network significantly lacks coverage - about 50% of all freight in Myanmar is transported by river barges that are heavily affected by seasonal changes in water levels.
China: Mining Sector To Lose Steam Despite Infrastructure Binge
Despite the Chinese government ' s US$156bn infrastructure stimulus package , we believe China's mining industry is set to experience slowing growth ahead as the country's rebalanc ing process begins in earnest. We highlight that t he plethora of announcements for new railway projects, road construction and port facilities are unlikely to provide a significant boost to mining investment in the coming years . Indeed, d eclining ore grades, increasing regulatory restrictions and environmental obligations, coupled with the slowdown in the domestic economy will conti nue to inhibit production growth and put a lid on in vestment.
India: Solution To Energy Crisis A Long Way Off
Chronic power shortages and a gauntlet of heavy bureaucracy, regulatory hurdles and pervasive corruption in India will continue to curtail mining investment and prevent companies from achieving their full production capacity. India remains firmly reliant on coal to feed the country's power generation needs. However, with no permanent solution to the domestic coal supply problem in sight, coal shortages are likely to remain a downside risk to Indian power producers over the short-to-medium term. We believe faster clearances for new coal projects, private sector ownership of coal mines and additional investment in rail infrastructure can be catalysts to investment in the coal industry. Furthermore, capacity constraints for rail networks and ports have resulted in higher transportation costs for iron ore miners, as compared with Australia and Brazil.
|Resource Nationalism Returns To Haunt Miners|
|Mongolia - Mining Projects & Railways|
Mongolia: Boom To Deflate Despite Concrete Improvement On The Ground
Although an influx of foreign capital into Mongolia ' s mining space ove r the past few years has enhanced infrastructure development and improved power supply, we continue to cast doubts on the near-term growth prospects of the country ' s mining industry. Indeed, Rio Tinto ' s operation of the US$6bn Oyu Tolgoi mine in the Gobi Desert remains fraught with difficulties until this day. While the company has spent vast amount of resources to construct the much needed infrastructure facilities ( of which include a 104km road, extensive water distribution systems and electrical power grids), the scheduled commencement of the project in 2013 is likely to be delayed given the rising threat of reso urce nationalism. In a move to incr ease royalty pa yments by mining companies, the Mongolian Parliament has recently approved a budget for 2013 that calls for US$319mn in extra income from the Oyu Tolgoi project. No doubt, the country ' s attempt to seek a greater pie from the minerals sector will weigh on investors' sentiment and dampen capital flows into the mining space.
Vietnam: A Rocky Road To Resource 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. However, we caution that deficiencies in infrastructure development and power supply will remain key impediments to the development of mining projects. Indeed, the attractiveness of mining investment remains very much conditional on the government resolving bottlenecks in the country's infrastructure support and power facilities. The continued divide between demand and supply of energy and resulting power cuts is a significant threat to the growth of Vietnam's mining sector. Energy policy is an area that will have to be addressed with more resolve than at present, as the government's officials have impaired investment in power generation by its reluctance to expose state-owned VietNam Electricity to competition.
|Overwhelming Challenges To Weigh On Mining Boom|
|Pakistan - Metal & Coal Mines|
Afghanistan & Pakistan: Not Just Infrastructure, But Insurmountable Challenges
We believe the challenges facing Afghanistan and Pakistan are acute and multi polar in nature, with the lack of political stability actuated by armed conflicts and rampant corruption being the most pressing issue. Although a few infrastructure projects have gone into administration, we expect mining investment in these countries to remain relatively muted as investors continue to adopt a wait-and-see approach given the ongoing and escalating violence in the region. In August 2011, China Kingho Group , one of China's largest private coal miners, pulled out from a US$19bn deal in the southern Sindh province due to security concerns as a result of bombing incidents in Pakistan's major cities.
Despite the colossal wealth of mineral resources on offer, the lack of export routes and intermittent power supply will continue to weigh on investors' sentiment and discourage mining investment. Pakistan continues to suffer on a day-to-day basis from the long-running and economically crippling energy crisis due to years of underinvestment and mismanagement. The country has reiterated its resolve to generate more electricity domestically by pushing ahead with the US$1.5bn Iran-Pakistan (IP) gas pipeline project. However, we remain doubtful on its future progress given the US' hardened stance on Iran. The former has been attempting to discourage Pakistan from going ahead with the IP pipeline, offering other seemingly optimistic but unfeasible alternatives such as importing electricity from Central Asian states.
|na = not available. Source: BMI Key Projects Database|
|Country||Company||Project Name||Value (US$bn)||Capacity/Length||Timeframe|
|Australia||Rio Tinto||Mine, port, rail expansion||21||na||Currently underway|
|Australia||Fortescue Metals||North Star power station||na||120MW||Proposed|
|Australia||BHP Billiton||Port Hedland Harbour Expansion||22||na||Delayed|
|Australia||Hancock Prospecting||Roy Hill railway||10||340km||Currently underway|
|China||DP World, P&O Group and Qingdao Port Group||Qingdao port expansion||4.6||600mnt||2011-2016|
|China||Baosteel Group||Shanghai-Hangzhou Express Railway||3.7||202km||Currently underway|
|China||APWR, Inner Mongolia Huolinhe Coal Trade Group||4 coal-based power generating plant, Inner Mongolia||0.6||800MW||2011-2015|
|India||RKM Powergen, Mudajaya Group||Coal-based power plant IPP project, Chhattisgarh||1.1||1440MW||Currently underway|
|India||Torrent Power||Coal power plant, Amreli, Gujarat||1||2000MW||Currently underway|
|India||Petronet||Two power plants, Gujarat and Kerala||1.2||1200MW||2009-2013|
|Indonesia||PT Bhinasena Power Indonesia||Central Java coal-power plant||3.2||estimated 2,000MW||Currently underway|
|Indonesia||na||Sumatra coal railway||2.4||na||Proposed|
|Indonesia||PT Penjaminan Infrastruktur Indonesia||Purul Cahu-Bangkuang coal railway||2.3-3.2||385km||Currently underway|
|Indonesia||Russian Railways||Murung Raya - Balikpapan coal railway||2.4||240km||Proposed|
|Indonesia||MEC Holdings||Muara Wahau - Bengalon coal railway||1||130km||Proposed|
|Mongolia||Lotte Engineering & Construction||Tavan Tolgoi-Choibalsan railway line||3||1040km||2012-2017|
|Mongolia||MTZ||Gobi rail project||na||1100km||Proposed|
|Myanmar||J-Power||Coal-fired power plant, Yangon||na||600MW||2012-2015|
|Myanmar||Toyo-Thai Corporation (TTCL)||Power plant, Yangon||na||100MW||Proposed|
|Philippines||San Miguel Corporation||Mindanao coal-fired power plant||0.3||300MW||Currently underway|
|Philippines||KEPCO, SPC Power Corporation||Naga coal-fired power plant, Cebu||0.1||200MW||Completed|
|Philippines||Global Business Power Corp., Formosa group||Toledo coal-fired power plant project, Cebu||0.3||84MW||Currently underway|
|Vietnam||Vinalines||Hai Phong International port||0.8||50kt||2012-2016|
|Vietnam||China Southern Power Grid Corp||Coal power plant BOT project, Binh Thuan province||1.8||1200MW||Currently underway|