Eureka Correspondence

Ethane Pipeline price fall; comparing iron ore markets; New Sat; tax; and confidence in super.

Ethane Pipeline’s two issues ahead

Would John Abernethy like to give subscribers an update on his thoughts for the Ethane Pipeline Income Fund since he wrote about it in October last year? It is noted the share price has been in 'free fall' during February.

John Abernethy’s response: I maintain my view that at $1.20 the trust was oversold based on public information.

The issue for investors and the market is twofold.

1. Will Quinos roll forward its pipe rental contract with EPX? This will follow two events. The first will be an extended supply agreement with Santos for ethane. The second will be a major upgrade by Quinos of its Botany plant. This will involve a plant closure but if this occurs this will be a major positive for EPX after a quarter decline in distributions – so watch announcements.

2. We need clarification on the volumes of ethane being passed through the pipe. From October part of the rental stream includes a volume based payment. On this point the forward guidance for the June Quarter distribution was confusing. Guidance suggested about the same as March quarter.  The March quarter distribution flowed from a closure of the plant in October. June has no such issue so the distribution should rise but that is speculation on my behalf.

So the distribution rate is between 3 cents to 3.5 cents per quarter, of which 80% is franked. 

Comparing major iron ore markets

Would it be possible to get a comparison between the major iron ore markets? We want to find out the costs involved of producing iron ore and shipping it to China from the Pilbara, from Brazil and from within China.

Also, what portion of the cost is allocated to freight from both the Pilbara and Brazil and within China? Pilbara iron ore miners appear to have the upper hand on the China market purely from a transport cost point of view, and they are also low cost, high quality miners. The prices that some of the analysts are putting out there (like $80 per tonne) are quite stupid as we all know that if that happened, most of the Brazil mines would simply shut down as uneconomic.

It is very difficult to locate any real figures regarding cost structure of the miners; they tend to lump all the costs together. The quality of the iron ore produced is also relevant (I understand the Chinese iron ore is getting to the end of life and is now more low quality).
Suzan Buckley

Tim Treadgold’s response: This is an incredibly complex subject that has a lot to do with ore grade, impurities, moisture content, shipping distance and other factors. In brief, iron ore is not iron ore –by that I mean it is not a simple, single element metal like gold, nickel or zinc. Basically, it is dirt with a high iron content and that iron content varies with every shovel load – as do the impurities such as phosphorous, silica and alumina, which incur a discount, and the “lumpiness” of the ore which earns a price premium because it is easy blast furnace feed.

 In short, you simply cannot compare iron ore from one part of the world with iron ore from another (or from one mine to another). All that is before getting to the hypothetical 62% price – which is a price for a product that hardly anyone actually produces; it’s either more than 62% (Gindalbie concentrate which is 68%) or less than 62% (FMG fines which are 58%).

Sorry to not provide a simple, direct answer, but there isn’t one.

Australia’s tax system

I find it interesting that the superannuation attention has again turned to the possibility of pension accounts being taxed.  Considering the nightmare to implement it was considered under the Rudd government, I doubt anything similar would be put forward. I do agree however that our current superannuation system is unsustainable and changes need to be made.  What I consider fair and reasonable and easy to implement is a flat 5% tax rate on ALL funds in pension phase regardless of size or income.  5% is such a small amount that surely no one should complain, but it will still bring in sufficient funds.
Michael Raiteri

Taking the plunge on NewSat

I have been close to buying shares in NewSat for several months. Every time I decide to take the plunge something happens to warn me off. Today I feel slightly more positive after watching Alan's interview. What a big risky venture for this company. Good luck to them and as outdated as it sounds, I reckon it's worth backing an Aussie having a go. It will be a nervous launch day and the closest I will ever get to being in the space race so come Monday, I'm in!

Rising confidence in superannuation

Bruce Brammall’s article, Bull run a super confidence booster, seems to suggest that survey results showing an increase in sentiment is good (where confidence in adequacy of retirement income was up from 45 to 55%). Yes, it may be, but surely when scarcely more than half of survey respondents have confidence, that is actually disastrous.

Similarly "confidence in superannuation as a retirement income source" was up from 44 to 61%. This means less than two thirds of people  feel confident, which is deeply saddening. The FACTS are that many superannuation funds went down around  50% in early 2008 so obviously investors would still be waiting for the 100% increase necessary just to get back to break-even.

We are a long way from that, and if we believe Mr Gottliebsen, we may never get there.
Trevor Best

Bruce Brammall’s response: Thanks for your letter. I don’t disagree, however, I wasn’t making a comment in regards to the confidence in adequacy of retirement income – I was merely literally quoting the report in regards to that fact. The point of the article was not to say that rising confidence is good or bad, or whether a 55% score is satisfactory. The report stated that it was on the rise and I was making more of a comment that it’s interesting that rising satisfaction, and the timing of the reports, seemed to be linked to the health of the stock market.

From my time in the finance industry, what scares me the most is the low level of understanding that most people have about superannuation (though I would not say that’s true of Eureka Report readers). Again, this was more a story about the timing of two surveys and what was happening with the stock markets at the time the surveys was taken.

Lastly, the only funds that will have gone down 50% or more between November 2007 and March 2009 – the market top to bottom was about 17 months – will be those that had close to 100% of their superannuation invested in shares (domestic and international) and property (domestic and international), or had lots of money invested in particularly speculative stocks. Anyone who had even 20% of their money invested in cash and/or fixed interest was unlikely to have seen their super fall by 50%. And if you had more than that in cash, then falls would have been increasingly limited by the increased weighting to defensive assets.

Yes, you would need a 100% increase if you’ve fallen 50% to get back to even. But what the All Ords and ASX200 don’t count is dividends – you need the accumulation indices for these. And over five years, that would add approximately 20% to the returns.

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