Editors Picks: Slash and earn

Profit season is turning out to be about what to cut rather than to grow in a worrying sign for jobs. But we’re feeling generous so we’re making one of the KGB’s articles free to Ed’s Picks readers!

We’re halfway through profit season and for most of Australia’s top companies it’s been a pretty good result. But go through the numbers closely and it’s good news for yield investors but bad news for workers.

Most of the EBIT improvements came from cutting below the line rather than growing revenue. The big miners have been trimming fat at a rate of knots – they have to because they see a more uncertain future ahead.

As Stephen Bartholomeusz writes;

There are a myriad of very small decisions that go into improving the productivity of an existing asset. The miners are clearly desperate to take full advantage of the inverting of their relationship with contractors and suppliers – who used to exploit the upper hand in any negotiation – to drive down costs and capital intensity and strip out the boom-time inflation embedded into their operations while they can.
The results of BHP and Rio – and the distress experienced by contractors and engineering groups – says they are succeeding beyond expectations.

You can watch Stephen explain what that means here.

As Stephen explains, the current pain – and job losses – seen in the mining services sector is a direct result of the new cost focus for the miners. It has been a fortnight of bad news for anyone involved in the manufacturing sector and as I write Qantas looks to be preparing the ground for 3000 redundancies. At least hard-hit Geelong can breathe a sigh of relief that Shell’s refinery will stay open under Vitol.

But job cuts are coming and they seem to be accelerating. That will take a huge toll on the Australian middle class – particularly males – according to Robert Gottliebsen, something that the US has been discovering over the last decade. He writes;

Some 15 years ago, I can remember dining with a top Chinese official who confessed he was staggered that the US would allow its manufacturing skills base to be decimated. He knew what it would mean to American income structures. At that time, the US believed manufacturing jobs would be replaced by the services sector, not realising that just as many of those jobs would go offshore on the back of internet technology.
All this means is that companies that are serving the middle class need to watch very carefully how their demand patterns are moving. It might be necessary to organise products and services that are either up market or downmarket.
In the US, companies have responded with enormous productivity drives. They are way ahead of Australia, but we will follow. (free here)

Alan Kohler worries about the looming job losses and the impact that will have on the business sector’s already wobbly confidence. A lot of what is happening to Australia can be chalked up to global turbulence, but our politicians have exacerbated the problem with years of rancorous and unproductive debate. According to Alan;

With the benefit of hindsight a minority Labor Government ruling with the support of the Greens and two rural independents, and an Opposition with a sniff of power prepared to say anything to get there, was the worst possible election result for business.
Tony Abbott and the Coalition in Opposition are not off the hook either: their hysterically confrontational behaviour and constant negativity made the situation more feverish and seem more uncertain than it already was.  
The resulting hiatus in business investment is the main reason the Australian economy is now suffering a shortfall of productivity, competitiveness and employment. Business confidence is now rising again following the 2013 election but it will take a while for this flow through to investment again
What the Australian economy needs now is not more reform, but consistent, sensible decision-making, preferably pro-business and preferably less of it. Less change, fewer announcements and most of all, less politics.

Hear, hear.

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Pic of the week

This chart explains exactly what is happening to the Australian mining sector. Look at the projects under former BHP CEO Marius Kloppers and those under Andrew Mackenzie.

Graph for Editors Picks: Slash and earn