Thursday, April 2, 2015

Iron ore falls to US$49 a tonne - more bad news for Joe Hockey's budget

It's now a daily occurrence and for the Federal Government it's constant bad news that's likely to get worse.

For sixth consecutive session, the spot price for iron ore has fallen  - this time to US$49 a tonne.

With every fall, it's another hit to Joe Hockey's shaky Budget which has been relying on tax revenue from iron ore exports.

Source: Thomson Reuters

This time last year, when the spot price was US$119 a tonne, the Treasurer was factoring in a fall to around US$100 on expectations that the big miners who had been feeding a massive appetite from China would continue to provide sustenance for Treasury coffers.

But today at US$49 a tonne,  the price has more than halved to the lowest level since the iron ore benchmark began in 2008,

Deloitte Access Economics now estimates that the plunge could strip $3 billion from the 2015/2016 budget, even after a revision in the midyear update just before Christmas.

So now with corporate tax receipts down as the price hits the bottom of a wild cycle, it's getting even tougher for Mr Hockey to get the budget back into balance.

Source: Thomson Reuters

What is now a resounding correction is all part of the big economic picture in China, where annualised economic growth is slowing to around seven percent.

The reality check for the world's second biggest economy means less manufacturing, less construction and therefore lower demand for steel.

As a result, the normally big stockpiles of iron ore aren't being topped up as frequently.

At the same time, savvy operators of Chinese steel mills are playing a waiting game on the expectation that the iron ore price is likely to fall even more - so why buy now?

Steel mills are also under pressure from Chinese regulators to tighten up environmental standards and are looking at ways to cut costs as they reduce emissions.

In addition to hurting the Federal Budget, the correction is also continuing bad news for Australia's iron ore exporters.

On top of yesterday's falls, there was more selling in early trade with BHP Billiton down 0.5 percent, Rio Tinto 1 percent and Fortescue Metals 2.7 percent weaker.

Last week, Fortescue's outspoken chairman Andrew Forrest suggested the big miners should cooperate to cap iron ore production to keep the price high.

That earned a warning from the chairman ofthe ACCC Rod Sims that even the suggestion of cartel activity might risk not only civil but criminal penalties.

In a report issued yesterday, Deutsche Bank is forecasting that prices may drop below US$40 as weaker currencies and lower energy prices eased producers' costs.

Bloomberg has quoted a Standard Chartered report which warns that tumbling prices risk mine closures and job losses at sites across the globe, including in China.

As prices tumble, some higher-cost mines are closing or suspending output. More than 210 million tons of capacity has been cut, with additional closures to come, according to Morgan Stanley, which reduced its price forecasts last month.

Wednesday, March 25, 2015

Reserve Bank warns on Sydney property - don't bet the house on it

The latest health check on Australia's financial system should provide the stark wake up call for investors betting that real estate prices will always keep rising.

The Reserve Bank has a blunt message - don't put the house on it.

In a ramped up warning about stellar markets in Sydney and a lesser extent Melbourne, the RBA's twice yearly Financial Stability Review is cautioning that investor exuberance and high expectations could see more than just a few fingers burned.

The RBA is warning that price falls in real estate could hurt even those who decided it's too risky to bet on real estate as an investment that always reaps big capital gains.

The key message about a broader economic fallout should be ringing alarm bells for investors on interest only loans and banks that risk exposure if prices fall or unemployment spikes.

In other words - what goes up can and does often go down.

"Ongoing strong speculative demand would tend to amplify the run-up in housing prices and increase the risk that prices in at least some regions might fall significantly later on," the Review says.

"The consequences of such a downturn is prices are more likely to be macroeconomic in nature because the effects on household wealth and spending would be spread more broadly than just on recent property purchasers."

And while household debt is currently at low levels, borrowers stress "could start to increase if labour market conditions weaken further than currently envisaged."

That's a real risk given that the official jobless rate is expected to peak around 6.75 percent later this year.

The RBA notes that the recent decline in the cash rate to 2.25 percent is likely to boost demand by borrowers and that given the low rates environment "it is important that lending standards do not decline."

In addition to residential real estate investment, the RBA has also flagged that risks appear to be building in the commercial property sector and that "particular caution around collateral valuations is warranted in the current environment of declining property yields."

Today's financial stability update ramps up a warning in the September review that property is becoming "unbalanced" and that speculation increases the potential for prices to fall.

Tuesday, March 17, 2015

Reserve Bank sounds alarm about commercial property sector

The Reserve Bank is becoming concerned about a price bubble building in the commercial property market.

In the minutes from its board meeting a fortnight ago, the RBA sounded an alarm about steep price rises particularly in the hot Sydney real estate market.

"Risks had been beginning to building in commercial property markets, including developers of residential and non-residential property," members noted.

"Prices in several market segments had been rising, even as vacancy rates remained high and leasing conditions weakened."

The caution comes as market watchers ramp up warnings about dangerous asset price bubbles building in real estate around the world.

The RBA also remains concerned about the residential sector, particularly in Sydney and Melbourne, and that February's surprise interest rate cut to a historic low of 2.25 percent could fuel investor interest.

"At the margin, the recent decline in interest rates could boost the housing market, including prices," the minutes say.

However, the RBA said that recent measures announced by the APRA (Australian Prudential Regulation Authority) and ASIC (Australian Securities & Investments Commission) were designed to "temper housing market risks" faced by both households and lenders.

"Although these risks need to be placed in the context of the prevailing low levels of household stress."

The minutes also show that the decision on March 3 to keep the cash rate steady at 2.25 percent was a close call so the RBA could assess the impact of the surprise February reduction.

"Members saw benefit in allowing some time for the structure of interest rates and the economy to adjust to the earlier change," the minutes note.

"They also saw advantages in receiving more data to indicate whether or not the economy was on the previous forecast path."

The RBA board also signalled it is waiting on a decision by the US Federal Reserve on the direction of the Federal Funds rates which has been at between zero and 0.25 percent since the depths of the global financial crisis.

The board noted "the greater degree of uncertainty about the behaviour of borrowers and savers in a world of very low interest rates".

The minutes also confirm the RBA will not be relaxed until it sees the Australian dollar fall even further than last week's six year low of 75.7 US cents.

"Although the Australian dollar had depreciated, particularly against the US dollar, it remain above most estimates of its fundamental value."

The Reserve Bank board holds its next meeting on Tuesday (date) and money markets see a 50 percent chance that rates will be cut to a new historic low of two percent.

Thursday, March 12, 2015

Australian dollar lowest since May 2009 but RBA says not low enough

In long-awaited good news for local exporters, the Australian dollar has hit its lowest level since the depths of the global financial crisis.

Now markets are betting on how low the dollar could go as the softer currency starts working its way through the economy.

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

Earlier this morning the dollar went as low as 75.6 US cents - the lowest point since May 2009 in the wake of the Lehman Brothers collapse.

The lower dollar represents a welcome shift for the Australian economy after peaking at more than 110 US cents in August 2011 when Australia was riding the wave of the mining boom.

While the surging dollar was great news for anyone travelling overseas - especially to the United States -   it was crunching local exporters.

Many smaller players went to wall and big local manufacturers like Ford, Holden and Toyota are now moving offshore citing the high dollar as one factor.

But now, the tables are turning with the dollar lower in part because of good economic news in the US is fuelling a resurgent greenback.

Yesterday, Reserve Bank assistant governor Chris Kent noted that exports of services like tourism and education are bouncing back and in terms of income, they're overtaking exports of iron ore which is now below 58 US dollar a tonne this morning.

Over the past year, the RBA has cited 75 US cents as an approximate target for the Australian dollar but speaking in Hobart yesterday, Chris Kent sent signalled that the dollar might need to go much lower to provide maximum relief for exporters.

Economists remain focussed on when the Reserve Bank might cut the cash rate again to put downwards pressure on the Australian dollar.

A key focus will be on official employment figures from the Bureau of Statistic for February to be released this morning.

Most economists think the jobless rate for February will remain steady at around 6.4 percent with some predicting a slight fall to 6.3 percent.

However while the unemployment figure remains in that vicinity still the RBA has good reason to be be nervous especially with predictions that it could peak later this year at 6.75 percent.

"The Australian dollar has depreciated by nearly 20 percent on a trade weighted basis  since its peak in mid 2013 and is starting to play a role in helping the economy to adjust," Dr Kent said.

 "While the depreciation seen to date will be helpful it's still our assessment that our exchange still remains relatively high given the state of our overall economy."

Wednesday, March 11, 2015

Cheques not dead yet, but demise is in the mail

The future of cheques as a payment method for many Australians is continuing to slide with transactions falling by almost 14 per cent in 2014.

In a sign that rusted-on cheque users are adapting to changing times, electronic payments grew in the same period with payment card use up by 8.8 per cent and direct debits by 7.5 per cent.

The Australian Payments Clearing Association, which regulates the payments industry, says while cheques are gradually falling out of everyday use they are still being used for major business transactions and property settlements.

The research adds to evidence that cheque use has been declining over the past decade with a 71 percent demise between December 2002 and December 2014.

APCA's chief executive Chris Hamilton told AM that although a "hard stop" to cheques was unlikely,  users should consider switching to electronic alternatives which are now secure, cheap and reliable.

"Older people are much more likely to use cheques than younger people. What the most recent figures show us is that cheques are falling out of general ordinary everyday use quite quickly," Mr Hamilton said.

"Cheques reached their sort of high point in the mid 90s and they've been in decline ever since. The first part of that was quite slow but I think now we're seeing the volumes of them dropping off. So I expect that within the next few years I'll be quite rare to see a sort of cheque in everyday ordinary usage, although they will still be used for specific types of transactions."

But Mr Hamilton says while cheque usage is unlikely to bounce back, banks are unlikely to cease accepting them for the time being.

"It's unlikely that in Australia we're going to have a sort of hard stop. That's been talked about in various countries around the world that perhaps didn't have as strong a tradition of cheques as we do where they have actually turned the cheque system off," Mr Hamilton said.

"What's more likely to happen is if people want a cheque book then they'll have to find an organisation that wants to supply that. Increasingly their biggest problem will be the payees don't want to accept their cheques. So over time it's going to get harder and harder to use them."

Mr Hamiton said the biggest concern for banks and consumers is the cost of processing cheques which can cost five dollars per payment.

But he says the increasing trend for merchants to switch from accepting cheques to electronic payments only will ultimately encourage ever "rusted-on" cheque users to make the switch.

"It is very cultural. And I'm not sure that it's to do with specific issues about security or anything like that. In fact according to our statistics the fraud rates on cheques, while they're low, are still higher than for example what we would call a direct entry payment, which is the sort of basic electronic payment that goes through the system," Mr Hamilton said.

"So I don't think it's really a security issue. I think it's much more what you grew up with and what you feel comfortable with. And so we see it as a process of gradually saying, hey look, there is another alternative. It might be easier for you to use it once you get yourself set up."

Research by APCA shows the Australians are using less cash with the number of ATM cash withdrawals down by 4.8 percent to 714 transactions valued at $143 billion.