THE DISTILLERY: Fortescue findings

Jotters evaluate Fortescue's ambitious expansion plans, and they also lend their pens to the state of Australian auto manufacturing in the wake of Ford job cuts.

Andrew Forrest has proved many doubters wrong with Fortescue Metals Group. As such, the mining billionaire commands a great level of respect from Australia’s business commentators. But the divergence in tone between himself and the top brass at Rio Tinto is a cause for concern, as is the iron ore miner’s debt levels, on top of Fortescue’s skinnier margins. Also in this morning’s edition of The Distillery we’ve got a range of comments on Ford Australia’s job cuts that, in all honesty, the authors could have written in their sleep.

The Australian Financial Review’s Chanticleer columnist Tony Boyd acknowledges that this country would be a better place if we had more Forrests.

"Australia needs more of the supreme optimism that pervades Fortescue Metals Group, which yesterday brushed off the need to raise another $US1 billion in debt as it pushes ahead with plans to triple its iron ore output over the next two years. But it is hard to ignore the stark contrast between the upbeat messages from Andrew Forrest’s FMG and the conservative and cautious remarks from rival iron ore producer Rio Tinto. Rio chief executive Tom Albanese issued a three-sentence statement with his company’s strong second-quarter production results yesterday, and it was all about the need for caution about developments in Europe and the United States.”

Business Spectator’s Stephen Bartholomeusz explains the context of the cost blowouts and points to the iron ore miner’s debt levels

"Fortescue blamed design changes, general price escalation, delays in offloading equipment and increased housing costs for the increase. It also experienced a $US200 million increase in its spending on its port and rail facilities, offset by a $US100 million reduction in expected spending on its Chichester Hub project. In the context of a $US9 billion expansion program, and in the inflationary environment all the big miners are experiencing as they scramble to increase production, a 6.6 per cent blowout in capital costs isn’t by itself a major issue and, indeed, the market seemed to take that news in its stride. The issue for Fortescue has always, however, been its debt levels as it has pursued a remarkably bold expansion strategy to create a third force within the Australian iron ore industry behind Rio Tinto and BHP. Fortescue has nearly $US6 billion of debt and still has, after the revised budget, another $US6.2 billion of capital expenditure to go.”

The Australian’s Criterion columnist Tim Boreham explains how the Pilbara forces have been unleashed with some help from overseas and that tighter margins could hurt Fortescue.

"One reason for the strength is that Pilbara producers have benefited from Brazilian and Indian producers posting poorer numbers because of bad weather and other factors. Macquarie Equities forecasts exports of 532mt this year, 15 per cent higher. At current prices there is still a handsome margin, but any decent correction could throw our local heroes (especially Fortescue with its lower-grade ore and higher debt) off the podium and into the London smog.”

The Australian Financial Review’s Peter Roberts laments that the Ford story is a familiar tale.

"The decline of Ford Australia’s manufacturing operations is disturbingly similar to the final days of Mitsubishi as a car manufacturer in Australia. Having already announced one cutback in production levels and associated layoffs, the company is again shedding more staff at its Geelong stamping and engine plant and its Broadmeadows assembly plant in Melbourne. Mitsubishi made repeated cuts to production and staff as its ill-fated 380 model failed to live up to expectations, leaving its Adelaide plant as a virtual ghost town bereft of essential engineering and other support staff. The last 380s were sold in 2008.”

Fairfax’s Tim Colebatch remembers how Ford had captured a strong market position not that long ago with the Falcon.

"Then our tastes changed. Oil prices rose. Families shrank. Business became more cost-conscious. And the dollar started its immense rise. The Falcon was a big petrol guzzler, and they went out of fashion. By 2010, Falcon family sales were down to 44,000. This year, they will be barely 25,000. Some of that went to its cousin, the Territory. But even the Territory has lost ground as the high dollar made its foreign rivals much cheaper and put export markets out of reach. Ford's US bosses failed to be decisive. They wanted their cars to have global platforms, yet the Falcon's rear-wheel drive was unique to Australia. They would not allow it into the big export markets that underpinned Holden and Toyota. And they kept it as a big powerful guzzler when tastes changed.”

The Australian’s motoring editor Philip King says a number of backflips at Ford have made its decline in Australia worse than it needs to be.

"Previously Ford had signed off on the design disaster that was AU and made a nightmare move into retailing that put its dealership network offside. And before long, it was stuffing up again. Short of development resources and subject to constraints from Detroit, it burnt its engineering dollars on programs that went nowhere. With emissions regulations looming, it decided to kill its ageing locally built six-cylinder engine and replace it with a modern V6. Two years later, after a lot of wasted effort, the decision was reversed. At the same time, it decided to add the Focus small car to its Melbourne factory. But it changed its mind about that, too. Every reversal had a cost.”

Still on cars, The Australian Financial Review’s Robert Guy says US Federal Reserve chairman Ben Bernanke would actually like Americans to be buying more cars.

In other company news, The Australian’s Bryan Frith says DuluxGroup will have to increase its offer for Alesco Corporation. Fairfax’s Elizabeth Knight looks back at the decision by Amcor to demerge the now notorious ASX problem-child PaperlinX. And Fairfax’s Insider columnist Eli Greenblat (Ian McIlwraith is on leave) says raiders are preparing to hit ClearView Wealth.

In banking, Fairfax’s banking writer Eric Johnston says Commonwealth Bank will roll out its advanced Eftpos terminal next year, which it hopes will give it the edge in processing business transactions. And Fairfax’s Ross Gittins enlightens his readers on the structural changes that are taking place in the Australian banking industry.

In government-related news, The Australian Financial Review’s Matthew Stevens takes issue with claims by the government that the successful intervention in the Bowen Basin industrial dispute by Workplace Relations Minister Bill Shorten shows that the system works. The AFR’s economics editor Alan Mitchell delves into the frustratingly fruitless world of free trade negotiations.

The Australian’s John Durie finds the corporate regulator warning the unlisted property market over poor reporting. The Australian’s economics editor David Uren argues that it’s up to the states to make the case for an increase in the GST. It’s an observation that seems so obvious, but The Distillery can’t remember anyone else making it.

The same newspaper’s Barry Fitzgerald says the market strongly suspects that iron ore prices will eventually give in to the pressures that all other commodities have succumbed to.

And finally, Fairfax’s Michael Pascoe looks at some of the inherent contradictions in the way we approach our employment market.

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