THE DISTILLERY: Boom and gloom
Jotters try to frame the moving status of Australia's miners, including BHP and Rio, while one examines the precedent to the Qantas stoush.
Firstly, Fairfax’s Peter Ker says BHP and Rio are often viewed through the prism of their similarities, but the resources reporter argues their differences were very much on display last week for all to see.
"Sure, there are still many similarities: both are big in the Pilbara, eastern Australian coal, they share copper assets and are simultaneously trying to exit diamonds and aluminium. But the past 18 months have been a period of incremental divergence, to the extent that some BHP insiders – perhaps imperiously – believe comparisons between the two are increasingly irrelevant. The most obvious decoupling force has been BHP's petroleum business, a long-standing division that was turbo-charged with last year's $20 billion spend on United States shale assets.”
The Australian Financial Review’s Matthew Stevens was particularly taken by the praise Rio boss Tom Albanese showered on Fortescue Metals Group chairman Andrew Forrest and what the context of that praise said about the outlook of the Australian resources space.
"In what is the most effusive endorsement I can recall of Forrest’s success by a Rio executive, Albanese added: ‘I want to give Andrew Forrest a lot of credit for taking that initiative when people were disbelieving. But that is not something everyone can do... ‘Independent forces are making it more difficult for new prospects to come into the system, whether they are new projects from a Rio Tinto perspective or another major’s perspective and certainly new projects from what would be deemed emerging players.’ It is this coalition of forces that has forced a new period of conservatism on Rio and its Anglo-Australian rival BHP Billiton. Each is now committed to living firmly within its means by forcing a tidal shift in operating costs and trimming its capital program to meet cash flow constraints. Within hours, events were validating Albanese’s paradigm-challenging view as some of our official capital investment data began to catch up with what the miners have been telling us for a while – that a spending slowdown is already well in train – and as yet another junior trimmed its ambitions to meet the current capital drought.”
When things get tight size really does matter and The Australian’s Sarah-Jane Tasker takes a look at some of Australia’s smallest players to see how they’re coping with the forces that concern their larger cousins, BHP and Rio.
"Australia’s junior and mid-tier miners are under increasing pressure as funding sources dry up, threatening the next pipeline of projects and reducing the rate of new discoveries. The focus on the sector has been on the major miners tackling cost increases and new government taxes but at the junior end, where the new mines of the future are generally discovered, drilling has slowed and industry veterans warn that the full impact will not be felt for another decade. Michael Fotios, who heads private investment company Investmet and sits on a number of mining boards, said it had clearly become tougher over the past three to six months for the junior end to attract capital to discover new projects.”
The Australian’s economics editor, David Uren, writes that previous over commitments have delivered a series of projects that simply shouldn’t have been built in the first place.
"The pullback in investment plans revealed in last week's capital spending survey is likely to be the first of a succession of downward revisions as companies slow their construction schedules. There has so far been little outright mothballing of projects already under construction but that is a risk, as companies wrestle with escalating costs in the face of prices drifting lower. Projects still undergoing feasibility studies are likely to be shelved until the congestion clears and the price outlook improves.”
As Business Spectator’s Josh Kenworthy explains, this misjudgement is not something confined to the resources sector. Australia as a country has overestimated the riches of the resources boom.
"Garnaut believes Australians have failed to recognise that the last decade was ‘exceptional’, and that the prices for commodities over that time were a factor of a very small and particular period in one country’s – China’s – history. It can be argued that the current state of America and Europe are also part of a very small and particular period in world history. On that basis, we should be preparing for that period to end, and our dollar to no longer be held hostage to our country’s position as a safe haven. This will open up the way for a re-diversification of the Australian economy; one that he believes will look more like it did between 1980 and 2000. The focus should now shift to a narrow scope of high-end manufacturing and agricultural exports, as well as Australia's existing strength in services for which Asian demand is high.”
Meanwhile, Business Spectator’s Shane White, author of The Last Gasp, delivered what this column believes was the best summation of last week’s parliamentary session, where Deputy Opposition Leader Julie Bishop led questions against Prime Minister Julia Gillard over the apparent AWU scandal.
"The PM padded them away like a young Ricky Ponting, claiming that she had already dealt with the allegations in a cleverly timed press conference before the sitting and turning the spotlight back on a conspicuously absent Abbott, who was at that point hiding meekly, yet sensibly, in Bishop’s shadow. Having Bishop lead the charge was clearly a ploy by the Libs to allow [Opposition Leader Tony] Abbott to avoid courting misogyny jibes, which even he would admit he has been handling recently like a present day Ricky Ponting.”
Best of luck today, Mr Ponting.
In other news, Fairfax’s Michael West says the jostling between Qantas boss Alan Joyce and predecessor Geoff Dixon is a warning of sorts to activist investors, adding for good measure that the latter once called him a "f***wit". Respect to Mr West, who also wrote a separate piece detailing the fees that have been racked up in the receivership of Burrup Fertilisers. It’s a pretty appalling situation.
In other company news, Fairfax’s Elizabeth Knight passes on the argument from Echo Entertainment that the total tax take from Sydney casinos will be higher if rival James Packer isn’t granted a licence.
Fairfax’s Ross Gittins looks at the sustainability of the superannuation incentives delivered by the Howard government, noting that there has an unmistakable change in tone from Canberra.
And finally, The Australian Financial Review’s Chanticleer columnist Tony Boyd delivers the results of his column’s outlook poll with Australian chief executives. The results were relatively predictable; inflexibility in the industrial relations system remains an issue, the Australia in the Asian Century white paper was positively received and the election year is likely to impact many big Australian corporates negatively.