Will optimism derail cruising QR?

Since its privatisation two years ago, QR National has embarked on a ruthless cost-cutting spree in a bid to improve productivity and find cost efficiencies. Today's results show that strategy has paid off.

In 2010, QR reported a full-year net loss of $222 million. In 2011, the company swung back to a profit of $361 million. And this year, QR increased its profit by 22 per cent to $441 million.

Revenue has also lifted in the past 12 months, rising 10 per cent to $3.6 billion. So, despite lower volumes in the year, QR saw improved margins as a result of ongoing efficiency gains.

But as reports increasingly predict the death of the resources boom, QR may find itself derailed.

Its current strategy is based on continued growth in demand for both coal and iron ore in coming years. But in the current environment, QR looks to be a bit ambitious in its growth estimates.

Despite expecting the softer demand for coal haulage to continue in the short term, QR anticipates increased coal volumes for the coming year. But volumes have been flat for the past two years since the company was privatised.

QR is also bullish on its medium to long-term outlook. QR has based its outlook on the robustness of the Australian resources sector and that the drivers for demand in Asia will remain unchanged. But what we're hearing from every other avenue is that this is not the case.

China has for months been in the midst of a slowdown that‘s threatening to get out of control as the country struggles with ongoing global economic woes. The latest HSBC "flash” Purchasing Managers Index released earlier today acts as a barometer of the country's manufacturing health; it fell to a nine-month low of 47.8 points in August. If Beijing doesn't take more decisive action in the coming weeks and months, it could have an even harsher impact on Australia's resources sector.

Resources Minister Martin Ferguson's latest comments don't exactly inspire confidence either. Speaking after BHP Billiton's announcement that it would not be proceeding with its Olympic Dam expansion, Ferguson has declared Australia's resources boom over.

BHP lays the blame for stalling its expansion plans on falling commodity prices and concerns over demand for resources. So when the world's biggest miner is worried about the falling demand for resources, it's surprising then that QR hasn't considered this in its forecasts.

But QR's decision to lay-off hundreds of staff could be a better indication of the direction it's headed. While its outlook suggests confidence in the robustness of the market, the decision to cut 900 jobs gives a decidedly negative impression.

Whether the decision is a bid to continue its efficiency drive or a pre-emptive strike against a declining resources sector, it makes sense for QR to keep cutting costs in the current environment.

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