Eureka Correspondence

FoFa crusade; iron ore profits; bond investing and more.

For and against Alan’s FoFA crusade

First off, congratulations and thanks to Alan Kohler for your nationally published letter.

I hope that your contribution may have a greater impact than my barely acknowledged correspondence with the Assistant Treasurer. Now in our mid-seventies my wife and I regard ourselves as fairly conservative investors with a "set and almost forget attitude to investment". We have had over twenty years exposure to the financial planning and superannuation industry, with an expectation that the FoFA legislation as enacted by the previous government would at last have given us significant negotiating power over the advisor/planner fees that we pay. I wonder what response, if any, has your "Dear Senator Sinodinos" letter provoked.

I viewed the Senator's attempt to justify the FoFA changes on ABC TV Lateline show on March 11 and considered his explanation fairly pathetic. However, I noted that legislation was to be introduced into parliament in the coming week, so we may soon assess the impact of the widespread community lobbying over the FoFA changes.

Again thank you for your contribution and please keep it going.

John Brodribb

It's about time you stopped banging on about financial planners (see Alan’s open letter to Assistant Treasurer Senator Sinodinos can be read here).

The vast majority of financial planners care about their clients and provide them with good advice.  Just maybe you should speak to some of the clients of true financial planners who are not motivated by sales nor are they rewarded by selling house product.

I disagree with the Government's decision to wind back FoFA. This decision will only lead to poor practices and sales techniques being entrenched.

The Financial Planning Association (FPA) is not overjoyed by the Government's FoFA decision, nor are the SMSF Professional’s Association of Australia (SPAA) and other representative bodies that are concerned about the future of the Advice industry.

Instead of focusing on financial planners why don't you focus on fund managers and their excessive fees. What do most fund managers do to earn their fees and in some cases "bonuses" or performance fees?

If you wish to be better informed about financial planners, their clients and their relationship, why don't you survey financial planners?

Des Rock

Profiting from the iron ore miners

After reading Tim Treadgold crowing on about tipping the fall in iron ore prices five months ago ( see Not so fine… behind the iron ore crunch), I feel compelled to point out that there have been some great profits to be made in iron ore stocks during that five months, including in the much indebted and maligned Fortescue, which rose from $4.44 in September to $6.22 in March.

Stock prices after this "crash" in prices are much the same as they were five months ago. There was a 50% profit to be made in Atlas Iron from September to its top not long ago, over 25% in BC Iron and I could go on.

If you predict a correction, you will always be right eventually. He says there "could be worse to come". Yes, but will there? There may well be but that will probably be followed by a bounce later. So, traders would have missed a bonanza by listening to Tim's "advice". Value holders are in for the long haul and wouldn't be listening and would have lost nothing.
Ken Morrison

Tim’s response: Thanks for the letter to EurekaReport. I agree absolutely with you that good profits have been made from iron ore stocks over the past 12-months, but I cannot see how the good times can continue.

Ever since I watched my first shipment of iron ore being loaded in the port of Geraldton from a WMC mine in 1966 I have also been conscious of the power of the Pilbara mines to more than satisfy demand. It was the Pilbara which killed Tallering Peak and Koolanooka Hills in the 1970s, and history is repeating itself as BHP and Rio crank up production, along with Vale in Brazil, to flood the market with iron ore, snatching market share (driving high cost producers out of business) and cementing their place as unassailable leaders thanks to their low costs.

Layer on top of that the sea-changes underway in China, from environmental clean-up demands (closing steel mills) and a crack-down on fringe banking and it seems to me that the days of rising iron ore prices are over, for now. You ask “will there” be worse to come and I can see no reason why 62% iron ore will not drop to the $US80/tonne mark over the next few years, and stay there for some time.

Investing in bonds

How do I DIY invest in bonds? I know about the managed fund approach and ASX access to hybrids and exchange-traded funds. If I want more direct access, how do I go about it? Is there an equivalent to ASX or is it down to a bond broker?
Name withheld

Editor’s response: Australia has a very limited bond market, as Philip Bayley touches on in his latest article New Zealand – the bond market we’d like to have. However, you can trade government bonds – exchange-traded Treasury bonds and exchange-traded Treasury indexed bonds – on the ASX like shares.

You can apply directly for corporate bonds through companies’ public offers, though there aren’t many open to retail investors in Australia. They will send you a prospectus that you must read to fully understand the bond’s features and risks. You can also buy and sell some corporate bonds on the ASX  (the secondary market) after they have been issued directly.

The challenge with cash costs

I found disturbing inaccuracies in Not so fine… behind the iron ore crunch. The cost of production for BHP and Rio are the Cash Costs, not the All In Costs delivered to China. However, the Fortescue and Atlas Iron costs were the All In Costs delivered to China. This is a distortion of the facts.

Also three important things you conveniently forgot:

  1. The exchange rate in favour of Australian Miners.
  2. The very expensive, inefficient, and fast depleting Chinese iron ore producers.
  3. The $40 freight differential between the Pilbara and Brazil, giving the Pilbara miners a very distinct advantage. My disagreement is not the All In Price of iron ore producers Fortescue and Atlas, but to compare them with the Cash Price of BHP and RIO is totally inaccurate.

Suzan Buckley

Tim’s response: My apologies if the cost comparisons in my iron ore story confused you. That was not the intention of a story which was pointing out that pressures mounting in the iron ore market are starting to have an effect on high costs producers. The challenge, just as it was with the goldminers of a year, or so, ago is to know the precise costs of each miners, and the exact price they get per tonne.

Rio and BHP’s all-in cost is around $US47/t which ensures strong ongoing profits at virtually any price. Some of the smaller miners, such as Atlas, Cliffs and Mt Gibson will be finding the current price stressful. In its latest research the investment bank, CIMB, reckons $US100/t is the tipping point for those smaller producers. I will take on board the comments you have made but add that it would be unwise of you to imagine that small Australian miners will be immune from the correction rolling through the sector, no matter what shipping-cost advantage Australia has over Brazil or currency benefits. There is simply too much ore heading into a market which is not growing as quickly as it once was.

Annual payments for pension accounts

Robert Gottliebsen states that the minimum annual payment for accounts in pension mode is 7% between 65 and 74 in his article Super-charge your savings. This surprised me, as I thought the rate was 5%?

Editor's response: Thank you for pointing out the error. As the Australian Taxation Office states in pension stands for SMSFs, the minimum annual payment is in fact 5% between 65 and 74. This has been corrected in the article.