Friday, February 5, 2016

RBA cautiously upbeat on economy but says China remains flashpoint

The Reserve Bank has delivered a cautiously upbeat report card on the Australian economy in the face of global financial turmoil.

But the RBA has repeated that despite local optimism, uncertainly about the outlook for China and the management of its economic slowdown remains a potential global flashpoint.

In its quarterly economic snapshot released today, the central bank has signalled qualified optimism about the local outlook given a falling jobless rate, low inflation, a lower Australian dollar and evidence the transition out of the mining boom is starting to take hold.

"Non-mining business investment is forecast to pick up in the second half of the forecast period, reflecting the improvement in domestic demand," today's statement says.

"There has been a noticeable improvement in labour market conditions that was not anticipated at the time of the previous statement.

The official unemployment rate for December fell to 5.8 percent after peaking at 6.3 percent during 2015, down by 0.5 percent.

"Also the low growth of wages is likely to have encouraged businesses to employ more people than otherwise," the RBA says.

The RBA also points to low headline and underlying inflation in addition to lower petrol prices caused by the plunge in global oil prices.

The outlook makes no material change to to economic growth outlook which it expects to increase gradually over the next two years to "be a bit above the decade average."

The RBA expects growth remain steady at between 2.5 and 3.5% to December 2016, slightly better that the forecast in November with headline inflation of between 2 and 3 percent for the same period.

However, the RBA says uncertainty about China and concerns about its economy remain a key focus for Australia.

"The outlook for China continues to be a key source of uncertainty for the forecasts," the RBA says.

"The recent bout of global financial market volatility has been characterised in part by concerns about the evolving balance of risks in China and the ability of Chinese authorities to manage a challenging economic transition.

"Any sharp slowing in economic activity in increase in the financial stresses in China could spill over to other economies in the region."

The RBA has warned that any unexpected fallout from China would "adversely affect commodity prices including those that are important to Australia" such as iron ore.

While plunging oil prices have damaged the balance sheets of global giants like BP and Royal Dutch Shell, the RBA believes lower oil prices will continue to support growth in Australia's major trading partners.

The RBA repeated the easing bias contained in Tuesday's interest rate decision when the cash rate was left steady at the historic low of two percent.

"Continued low inflation may provide scope for easier policy should that be appropriate to lend support to demand."

The RBA has also noted that significant steam appears to gone out of the hot real estate markets in Sydney and Melbourne.

It says building approvals have declined but remain at still high levels while housing prices "have declined a little" and auction rates have fallen.

Tuesday, February 2, 2016

Commodities crunch sees BHP Billiton hit with rating downgrade

The commodities crunch has dealt a serious blow to the credit risk profile of BHP Billiton.

The ratings agency Standard & Poor's has downgraded BHP's credit rating to A from A plus to reflect changes in forecasts for commodity prices.

In a statement, Standard & Poor's said the decision reflected "very challenging market conditions and increased demand uncertainty over the coming years".

Listen to my analysis from this morning's edition of "AM".

"Metal prices have come under pressure because of fears of lower demand from China, and excess supply remains an issue," S&P said.

"Particularly relevant for BHP Billiton, the oversupply of crude oil in the market results in very weak oil and gas prices, which we now believe will last over the foreseeable future, putting further pressure on its balance sheet."

S&P has also placed BHP on "credit watch with negative implications" and has signaled the miner's rating could be taken a notch lower after it releases its earnings later this month on February 23.

BHP responded to the downgrade saying it "has the strongest credit rating in the sector and remains committed to maintaining its strong balance sheet through the cycle."

The S&P downgrade comes as BHP struggles to maintain its progressive dividends to shareholders in the face of global turmoil and falling commodity prices.

BHP chairman Jac Nasser late last year refused to guarantee the progressive dividend would survive but said it as an "important distinguishing feature" for the company.

BHP maintains an A plus credit rating at Fitch Ratings and an "A1" assessments at Moody's which has the miner on review for a downgrade.

The miner's shares have plunged as result of the commodities crunch and fears about China's economy.

BHP shares ended 0.65 percent lower yesterday at $15.25

Monday, February 1, 2016

ACCC pursuit of Woolworths to be long and complicated

View from Level 18, Federal Court in Sydney. Justice Yates is taking the "long view: on ACCC case against Woolies

The Federal Court has laid out a what could be a long and complicated timeline as the competition watchdog pursues Woolworths over its tactics against supermarket suppliers.

Justice Yates has issued deadlines on when both Woolworths and the Australian Competition & Consumer Commission (ACCC) must file their respective cases and produce documents.

Highlighting the complex legal issues, Justice Yates said in the order issued on Friday that a hearing date for the case would not be set until after 4 August this year.

The ACCC instituted proceedings against Woolworths last December alleging it had engaged in unconscionable conduct when dealing with a large number of its supermarket suppliers.

The regulator is alleging that in December 2014, Woolworths senior management approved a scheme known as "Mind The Gap" as part of an urgent drive to reduce an expected shortfall in gross profit.

The ACCC alleges Woolworths sought $60.2 million in payments and that while some suppliers were expected to refuse, it knew some suppliers would ultimately agree.

It is alleged that the requests were made when Woolworths was "in a substantially stronger bargaining position than the suppliers" and that not agreeing to a payment would be seen as "not supporting" Woolworths.

Back in December, ACCC chairman Rod Sims said Woolworth's conduct was unconscionable and in breach of Australian Consumer Law.

The first deadline is on 15 February when Woolworths is expected to file its defence with the court.

Thursday, December 24, 2015

Fears of "peak oil" catastrophe fade as global oil glut deepens

With the world awash with too much crude oil at the moment, the fear of an economic catastrophe when fossil fuels start running out is quietly fading in the background.

The prediction is known as "peak oil" - what happens when crude oil extraction hits its maximum and supplies begin a steady and permanent decline creating a global shock.

Listen to my report broadcast on this morning's edition of "AM"

But now the "peak oil" argument is fast losing currency as global supplies of oil vastly outstrip demand pushing the US benchmark price heads toward 30 dollars a barrel.

Shane Oliver, chief economist at AMP capital investors, says the supply and demand table has well and truly turned on the once vocal peak oil advocates.

"They've been talking about a peak in the global production of oil for the last two decades now and it still hasn't happened and I think the reality is that they are going to remain wrong going forward," Dr Oliver told the ABC's AM program.

"Therefore the catastrophe that was predicted by the peak oil advocates where oil production would peak and there would be huge economic impact globally that just won't happen."

The "peak oil" argument has confronted a new global reality - or a new normal - driven by major geopolitical and economic factors rocking both the developed and developing world.

* US shale producers are pumping like never before and adding to stockpiles

* With US sanctions lifted, oil-rich Iran is about to rejoin the global market with US sanctions lifted

* the OPEC oil cartel is refusing to tighten supplies to keep prices high  Iran betting that US producers will produce themselves out of business

Watch the BBC's 2006 docudrama on "peak oil" fears -  "If the Oil Runs Out"  

AMP's Shane Oliver says rather the facing a "peak oil" shock, consumers and industries will move awat from fossil fuels in an orderly manner and renewable technologies get closer to reality.

" What's going to happen is that oil production globally will at some point peak but it's going to be because the world has moved away from oil towards the use of other things," Dr Oliver told AM.

"The electrification of automobiles and greater efficiency in the use of oil will drive a decline in the demand through time anyway."

Dr Oliver says that rather replicating a shock in the 1970s when OPEC restricted supply, the world is on the a revolution that will see the world requiring less oil.

"Only a decade ago I was being told that I've got to get rid of my car and replace it with a horse and buggy. That prospect appears as a less likely," Dr Oliver said.

"The reality is the days of the internal combustion engine using oil are numbered and I won't be getting rid of the car and getting a horse and buggy - I'll perhaps be getting a car with an electric engine."

Dr Oliver points to developments in battery life such as those used in the Tesla electric car.

"The technological innovation that we've seen in batteries and electric cars generally is mind blowing."

This morning, West Texas Intermediate crude had a rare bounce to US$36.66 a barrel but there are predictions the price could dip below US$30 next year as global oversupply deepens.

The focus in 2016 will be on OPEC's resolve in maintaining supply and the the potential impact as China's demand for oil weakens as its economy continues to slow.


Monday, December 21, 2015

Dysfunctional & outdated - has the AGM has it's day?

It's a sacred institution to many shareholders but the days of the annual general meeting could soon become the latest victim of digital disruption.

The Australian Institute of Company Directors (AICD) says the annual general meeting has had its day and the concept is "dysfunctional" in today's online world.

A survey by the business lobby group has found a third of the 5000 company directors surveyed found the AGM is outdated and needs to change with the times.

Listen to Peter Ryan's story from AM here

"The old company AGM is no longer meets its purposes. We're getting fewer and fewer people attending. And many of the decisions are made well and truly before the AGM is opened," chief executive John Brogden told the ABC's AM program.

"The concept that through democratic capitalism shareholders come along to an AGM where they vote and decisions are made is long gone."

Mr Brogden says there are better digital alternatives to preserve the shareholder voice such as online voting and webcasts that were more useful to remote shareholders.

"There are mum and dad investors who do like to chat to the managing director or the chairman after the meeting but if you're in Perth you're hardly going to fly over to Sydney for an AGM." Mr Brogden said.

"I think people used to enjoy a bit of sport at an AGM. I don't know whether that's constructive. But what's very constructive is people having a chance to engage formally and properly that they're by and large not getting at the moment.

"We want shareholders to be engaged in the activities of their company. But we don't want the only time they turn up is when something goes wrong."

 The renewed pressure to overhaul the AGM institution comes as more companies face protest votes over company strategy and a number of "first strikes" against remuneration packages.

For the Australian Shareholders Association the latest attack on the sanctity of the AGM has unleashed the expected response.

ASA board member Don Hyatt says personal shareholder contact - or the human touch - can't be replaced by technology.

"This is the one time of the year that the directors and the chief executive has to face the shareholders," Mr Hyatt told AM.

"It's a great opportunity to actually look the directors in the eye - particularly afterwards over a cup of coffee. You can speak to them and you get a real feel on whether they've got the shareholder interests at heart or whether they're in it for themselves."

Mr Hyatt used the example of News Corporation and other family controlled companies where attempts had been made to limit shareholder dissent or discussion at annual general meetings.

"There are a number of individuals and family owned companies who seem to think they're not accountable to the shareholders," Mr Hyatt said.

But despite calling AGMs dysfunctional, John Brogden says his reform proposal is not about silencing shareholder dissent.

"No. In fact we want to make it easier to people to attend and engage. So if you're a critic it's also certain that changes to AGMs will make it easier for people to be engaged rather than harder."

John Brogden is about to start talks on the future of annual general meetings with big super funds and institutional investors.

But for now the AGM is safe as any plans to reform or dump the shareholder gathering is subject to government legislation being changed.