Central bank rescue plans don’t impress stock markets
October 10th, 2008 | by mantrionline |THE reality of a looming western world recession took the headlines yesterday. Investors turned their attention away from the volatility to the certainty of a six to 12-month recession in the West.
Australia’s saviour, China, didn’t look so certain either after junior iron producers Mt Gibson and Fortescue advised that some of their customers have raised warning flags over planned imports.
In both cases it’s not the quality of the product that’s the problem, but their customers. And, despite the high-level assurances given to Prime Minister Kevin Rudd yesterday, the fact is China relies on exports — and with the US and Europe heading into a prolonged recession, China will suffer.
China needs 8 per cent growth to maintain its own employment levels and 6 per cent is the equivalent of economic disaster — so volume will be there, but not prices.
Since June Fortescue’s share price has fallen 75 per cent to yesterday’s close of $3.30 a share, and its planned expansion must be in doubt or dead.
The news from China is confusing because while junior iron ore producers in Australia are being told to hold shipments, Brazilian giant Vale is planning to lobby for price hikes from its top-end customers.
Rio Tinto and BHP had both talked about shifting more supply on to the spot market rather than take contract prices, but spot iron ore prices are now $US1.10 against contract prices at $US1.20.
Little wonder the British market, in particular, has taken to both BHP and Rio.
Rio yesterday was at a stunning debt-to-market capitalisation ratio of 66 per cent, which is more akin to a struggling company than a titan.
Its debt stood at $US40 billion against a market capitalisation of $US61 billion, compared to BHP at $US8.5 billion in debt and market value of $US105 billion.
Rio, it should be noted, has an interest cover of over 11 times and those Alcan asset sales are looking important right now.
The flight of the Aussie battler in recent days has been nothing short of extraordinary, falling from as high as US98c early this year to as low as US64c yesterday before recovering to US68c, but down 12 per cent this week alone.
Pick your reason for the fall, but the good news is that at least it moderates the impact of the economic slowdown — provided commodity prices don’t fall further.
This year wheat prices in Australian dollar terms have fallen 17 per cent. While iron ore and coal prices are contracted, as the months roll on, it seems inevitable that the commodity boost to the terms of trade will turn into a drag on the economy.
National Australia Bank for one is looking at slashing its 2009 year GDP forecasts from 2.25 per cent growth to 1.25 per cent growth.
While in the year to June commodity prices overall were up 22.7 per cent, by June next year they could be negative.
All this explains why, despite radical action from the world’s central banks, stock markets remain unimpressed — for the simple reason that the outlook for earnings growth is dismal.
The bond market at least has a slither of sunlight: the US yield curve is now sharply positive with a 300-basis point spread between 10 year bond yields at 3.6 per cent and 90 days bills at 0.6 per cent.
Bank fund costs have also narrowed sharply in the last two days, which all means banks can slowly but surely get back to work, borrowing short and lending long.
That is just the start of the process and nobody is expecting it to get better any time soon, but every bit of sunlight should be welcomed.
The way we weren’t
AS three of the Big Four run the numbers on Suncorp’s Metway bank, it is worth highlighting just how things could have been.
When Mike Smith arrived in town last October to take the reins at ANZ he got together with NAB’s John Stewart and suggested they should test Canberra’s willingness to break the Four Pillars policy.
This was duly done but both sides of politics said no and that was the ends of it.
Smith’s plan, as the new guy in town, was he would be the boss of the combined bank as Stewart was on his way out.
Suncorp’s John Mulcahy, of course, had similar dreams — before his Promina acquisition — with the idea of backing Metway into either CBA or Westpac and him emerging as the new boss late in the tenure of banker of the decade David Morgan.
As things have come to pass, when CBA or another buys Metway, the Suncorp board will face a decision on whether to leave Mulcahy, the banker, in charge of an insurance company.
The bottom line, then, on Four Pillars being changed is zero and NAB’s Stewart is now taking his replacement Cameron Clyne on a tour of duty around Australia before doing the same offshore with the results road show early next month.
Clyne officially took over as boss on October 1.
Bunnings hits ground running
AMID the impending economic gloom, Wesfarmers’ Bunnings team was banging the drum yesterday with a national advertising campaign looking for 81 new store middle-managers.
The hardware retailer is opening eight new stores but already has 1400 managers on its team so this exercise is as much about trying to maximise its talent pool.
While other parts of the retail industry are in turmoil it’s a perfect chance to poach talent.
Bunnings, of course, tried much the same by writing to Mitre 10 franchisees suggesting they might like to join the A team before the folk at Mitre 10 blew the whistle and got the ACCC to monitor its actions.
Elsewhere within the empire, Coles all rounder Mick McMahon has called it quits after obviously seeing the new team in place and better opportunities for his good self elsewhere.
The former Shell executive was highly regarded by both the new and old guard at Coles and served in several positions from head of supermarkets to supply chain and Express stores boss.
Now the import is complete, and with $2 million sign-on bonuses in place it was time to move on.
Crisis course
THE troubles being faced by the junior iron ore producers and the Bunnings management raid could have come straight from a briefing delivered to senior corporates in Sydney last week entitled: “What every executive should know about the financial crisis.”
Washington-based consultant Corporate Executive Board laid out its view on what went wrong and then laid down its advice to corporates on what to do now.
Step one is plan for increased costs and reduced availability of credit.
The strategy is to plan cash needs over next 18 months rather than next month’s need, build better relations with investors and financiers.
Develop a new response to supplier and customer capability, taking account of their changed circumstances with particular focus on counterparty risk.
Over-invest in ethical management and tone at the top, now is the time to set high standards.
Ensure an activist response to emerging market talent opportunities, target key internal staff and look outside for new stars.
Then balance aggressive but small merger and acquisition opportunities with more aggressive due diligence.
These are text-book responses but look around over the next few months and see which companies are actually following through on the basics.
