Analysing the fallout from the collapse of Silicon Valley Bank
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I am Leon Gettler. My job is to review and monitor the week’s news in business, finance and economics. I bring it all to you, every week.
This is episode number 07 in our series for 2023 and today’s date is Friday March 17.
First, I’ll be talking to Dr Sanjay Warrier about the business of health care during the pandemic. And I’ll be talking to EY economist Cherelle Murphy about Australia’s GDP, the RBA and the economic outlook.
But now, let’s talk to Sanjay Warrier.
Need legal information or legal advice? Today’s podcast is brought to you by Multi-Award Winning Law firm McDonald Legal, experts in the areas of Dispute Resolution and Commercial and Property Law. For a free consultation on your legal matter, McDonald Legal can be reached on 03 9070 1107 or by visiting the website www.mcdonaldlegal.com.au
So what’s happening in the news?
China’s efforts to ramp up lithium extraction could see it accounting for nearly a third of the world’s supply by the middle of the decade, according to UBS AG. The bank expects Chinese-controlled mines, including projects in Africa, to raise output to 705,000 tons by 2025, from 194,000 tons in 2022. That would lift China’s share of the mineral critical to electric-vehicle batteries to 32% of global supply, from 24% last year. The race to secure lithium is playing out at the highest levels, with nations including the US prioritising access to the materials necessary for making batteries as the world turns away from fossil fuels. China’s needs are particularly acute because it is home to the world’s biggest market for new electric cars.
Oil giant Saudi Aramco has reported earning $US161 billion ($A244 billion) last year, claiming the highest-ever recorded annual profit by a publicly listed company and drawing immediate criticism from activists. The monster profit by the firm, known formally as the Saudi Arabian Oil Company, came off the back of energy prices rising after Russia launched its war on Ukraine in February 2022, with sanctions limiting the sale of Moscow’s oil and natural gas in Western markets. The profit equates to $668 million a day. Aramco also hopes to increase its production to take advantage of market demand as China re-enters the global market after lifting its coronavirus restrictions. That could raise the billions needed to pay for Crown Prince Mohammed bin Salman’s plans to develop futuristic cityscapes to pivot Saudi Arabia away from oil. However, those plans come despite growing international concerns over the burning of fossil fuels accelerating climate change. Meanwhile, higher energy prices already have strained relations between Riyadh and Washington, as well as driven up inflation worldwide.
The fallout from the collapse of Silicon Valley Bank, the largest bank to fail since the 2008 financial crisis on Friday and the second largest bank failure in US history has roiled global markets and left billions of dollars belonging to companies and investors stranded. The collapse of three US banks since Friday has spooked investors and customers even in the face of policymakers introducing measures to protect depositors, and taking steps to bolster liquidity and shore up the banking system. How did it happen? The seeds of the problem were sown were sown when SVB invested heavily in long-dated US government bonds, including those backed by mortgages. These were, for all intents and purposes, as safe as houses. But bonds have an inverse relationship with interest rates; when rates rise, bond prices fall. So when the Federal Reserve started to hike rates more rapidly than markets expected to combat inflation, SVB’s bond portfolio lost significant value. A crucial lender to US technology start-ups, the bank came under pressure as Silicon Valley funding dried up, the result of an economic slowdown and rapidly rising interest rates. The crisis is beginning to spread around the world. Startup founders in California’s Bay Area are panicking about access to money and paying employees. Fears of contagion have reached Canada, India and China. In the UK, SVB’s unit is set to be declared insolvent, has already ceased trading and is no longer taking new customers. On Saturday, the leaders of roughly 180 tech companies sent a letter calling on UK Chancellor Jeremy Hunt to intervene. SVB also provided loans, debt and other banking services to a spate of start-ups with operations in Australia, which will have ripple effects in this market as some seek out other funding options or have their accounts frozen. This means Australia’s big tech investors have been caught up in the collapse of Silicon Valley Bank, the second-biggest bank failure in US history, after it emerged dozens of local start-ups have money tied to the financier through the nation’s major venture capital funds. Australia’s largest venture capital firms Blackbird along with AirTree, Square Peg and Folklore confirmed they hold exposure to the collapsed lender in what’s being labelled a potential ’extinction level event’ that could set start-ups back a decade. Canva, one of the country’s highest-profile technology groups, has emerged among a raft of Australian firms struggling to recoup money deposited with Silicon Valley Bank, as local venture capital funds reassure investors they can plug funding holes in their portfolio companies. SVB made a concerted push to expand its client base in Australia in the past two years, attracting a number of companies to its services including Crimson Education, an educational platform, Morse Micro, a local semiconductor maker, and the BHP-backed mine sensor firm Plotlogic. The SVB collapse could therefore have ramifications for the jobs market, the economy and lenders here that also bank companies that had relationships with SVB.
Analysts at Goldman Sachs on Sunday said it “no longer expects” the Federal Reserve to hike interest rates later this month, after federal regulators moved to swiftly shield the U.S. banking system from the crisis triggered by the rapid collapse of Silicon Valley Bank. In an analyst note, Goldman Sachs Chief Economist Jan Hatzius pointed to the “recent stress in the banking system” as the reason behind the no rate hike forecast. Last week, economists and traders had signaled they were expecting a hike of 50 basis points following the Fed’s meeting later this month. The note added there is now “considerable uncertainty about the path beyond March,” adding that it expects hikes of 25 basis points in May, June and July and a terminal rate of 5.25-5.50%. Hatzius and his team had previously forecast that the Fed’s rate hikes will reach a top level of 5.75%,
American NASDAQ-listed cyber security giant Rapid7 fears too few educational opportunities and a lack of public-private sector partnerships could dramatically undermine Australia’s ambitions to be a world leader in cyber security. Rapid7 Global Chief Scientist and Head of Research Raj Samani, who has assisted multiple law enforcement agencies on major cybercrime cases and is a special advisor to the European Cybercrime Centre in The Hague, said the firm was prepared to invest significantly in cybersecurity education in Australia. In his first visit to Australia last week Mr Raj attended several round table meetings with leading Australian companies, who revealed their concerns about a lack of training opportunities to build a significant local workforce to fight cybercrime. Rapid7’s Mr Samani said his firm had recently partnered with the University of South Florida in North America on an education program to allow “students in the US to come through and work on real data and projects.“ He said he would be open to striking similar partnerships in Australia. AustCyber, the Australian Cyber Security Growth Network, has estimated that the shortage of local cyber security workers could reach 18,000 roles in Australia in the next decade.
Treasury may block tax advisory firms from winning major government contracts if they do not have robust processes in place to “curb misconduct” in the wake of the PwC tax leak scandal, a move that would put at risk big four consulting firm work for the Commonwealth worth more than $1 billion annually. The warning comes as Treasury, the Tax Office and the Board of Taxation all flagged to Treasurer Jim Chalmers they are planning to overhaul their procedures around confidential consultations with the private sector when developing policy. In a letter to Treasurer Jim Chalmers on February 10, Treasury secretary Steven Kennedy wrote the department was working with the Tax Office to prepare advice for the government on further options “to penalise tax advisory firms which do not put in place appropriate government arrangements to curb misconduct”. On Thursday, the Senate approved a push by Greens senator Barbara Pocock to establish an inquiry by the finance and public administration committee into unethical behaviour by consultants engaged for government work. It was triggered by revelations that PwC’s former head of international tax, Peter Collins was registered by the Tax Practitioners Board after he leaked confidential government documents, which were shared with up to 30 PwC partners and staff as well as clients.
Australia will boost its annual defence spending by an average of 0.15% of GDP annually for 30 years to cover the acquisition, construction and operation of nuclear-powered submarines under the AUKUS pact, bringing the total cost to between $268 billion and $368 billion. However, the bulk of the cost will largely be borne by future governments. Numbers released on Tuesday to coincide with the official announcement, show AUKUS will cost the budget $9 billion over the next four years and up to $58 billion over the next decade, with the creation of 20,000 jobs, mainly in South Australia and Western Australia. However, the initial $9 billion cost over the forward estimates will be fully offset by savings elsewhere in defence. This includes $6 billion that would have been spent on the now abandoned French Attack Class submarines. The other $3 billion saving will be detailed in the defence white paper to be released in April. Similarly, the $50-58 billion medium term cost will be reduced by $24 billion that will not be spent on the French subs. This takes the total cost over the first 10 years to $26 billion to $34 billion. Details of the AUKUS program, launched in San Diego California on Tuesday morning, AEST, by the leaders of Australia, the United States, and the United Kingdom, confirm Australia’s acquisition of nuclear-powered submarines will be stepped up in three phases culminating in the domestic production of eight vessels starting in 2042. Starting this year, there will be “increased visits” of US submarines and from 2026, British submarines. From 2027, they will be stationed in Australia as part of a rotation. The second step starts in 2033 when Australia will acquire the first of three second hand Virginia class submarines to cover the capability gap. The next will be bought in 2036 and the one after that in 2039. Up to five could be purchased if need be. Without these subs, Australia would have had to rely on the ailing Collins Class submarines until the 2040s.
The Japanese government will tip in $2.35 billion towards a clean hydrogen gas project designed to make Victoria’s Gippsland region the centre of the world’s first liquefied hydrogen supply chain. Some of Japan’s largest industrial conglomerates are spearheading the Hydrogen Energy Supply Chain project, which aims to convert brown coal from AGL’s Loy Yang mine into hydrogen, which would then be liquefied and shipped to Japan. Carbon Capture and Storage technology would be used to store the carbon emissions in depleted oil and gas reservoirs beneath Bass Strait. The funding from Japan’s Green Innovation Fund comes as the project enters a commercial demonstration phase following a pilot project last year that delivered liquid hydrogen to the Port of Kobe in Japan. As part of the funding deal, a joint venture between one of Japan’s largest utility companies, J-Power, and trading house Sumitomo Corporation has been selected to produce the hydrogen via coal gasification. Kawasaki Heavy Industries and Iwatani Corporation are part of the Japan Suiso Energy (JSE) consortium that will oversee the liquefaction, loading and transportation process.
The world’s biggest offshore wind power developer has ambitions to develop up to 5 gigawatts of generation capacity off Victoria’s coast as part of aggressive entry plans into the nascent sector in Australia, and may also consider buying a stake in the country’s most advanced offshore venture. Mads Nipper, chief executive of Denmark’s Orsted, said the firm is “extremely excited” about the potential in Australia, given the federal government’s commitment to 2030 emissions reduction targets and net zero emissions by 2050, and the goals set by the Victorian state government for offshore wind. He said Australia’s combination of world-class wind resources, relatively shallow water depths off Victoria and its “stable” regulatory framework makes it “a really attractive market for us”. Listed on Nasdaq Copenhagen and with a market value of 244.7 billion Danish krone ($52.9 billion), Orsted has transformed itself from an oil, gas and coal power producer, previously named DONG Energy, to now producing more than 90% of its energy from renewables. Orsted, which has developed more than twice as much offshore wind capacity than its nearest rival, has sounded out potential acquisitions in renewables in Australia: it was an early participant in the auction process for CWP Renewables, a large portfolio of wind and solar assets that was eventually bought by Andrew Forrest’s Squadron Energy for $4 billion-plus. But Mr Nipper said that while Orsted “keeps its eyes wide open” on acquisitions, its main focus in Australia was on developing its own offshore capacity from scratch.
Lauren Cranston, the daughter of a former deputy commissioner of the ATO, Michael Cranston has been found guilty of her role in a $105 million tax-fraud conspiracy. Both Lauren Cranston, and her brother, Adam, were among five people to face a trial in the NSW Supreme Court, which began last April. The court heard allegations of a long-running scam in which the accused parties ripped off the government by keeping more than $100 million in GST and Pay As You Go (PAYG) tax. It was alleged a legitimate payroll company called Plutus Payroll was used to collect gross wages from employers, before money that should have gone to the ATO was siphoned off into “second tier” companies to distance the defendants from the fraud. It was the Crown case that random, unconnected and sometimes vulnerable parties were installed as directors of those companies. Last week, the jury found Adam Cranston and co-accused Dev Menon and Jason Onley guilty of conspiring to dishonestly cause a loss to the Commonwealth and conspiring to deal with the proceeds of crime. Lauren’s brother, Adam Cranston, was found guilty earlier this
The corporate watchdog is investigating “several” superannuation funds for greenwashing under consumer protection laws and “suspects” these matters will result in court action. Danielle Press, commissioner of the Australian Securities and Investments Commission, said members of the public were “reporting significant misconduct in this space” and that the compulsory nature of super meant it was taking an especially tough stance. Her comments follow ASIC launching a landmark greenwashing case against retail superannuation giant Mercer, alleging it misled members of its Sustainable Plus fund by claiming it excluded investments in “companies involved in carbon-intensive fossil fuels”, alcohol production and gambling. But the fund was actually invested in nearly 50 oil, coal, beer and wine, and gambling companies, ASIC said, including AGL, BHP, Whitehaven Coal, Treasury Wine Estates, Crown Resorts and Tabcorp. Some funds such as UniSuper argue that their investments in fossil-fuel companies still align with sustainability goals as the sheer size of their holdings gives them influence over how these entities drive the energy transition. But Ms Press said any funds making such claims needed to be able to back that up with evidence of how they were wielding that influence and whether it was effective.
A $5.8 billion ethical investment fund in Australia sold all its shares in Lendlease Group, one of the country’s biggest property developers, saying a planned housing project in southwest Sydney threatens a vulnerable koala colony. Australian Ethical said the sale is among the first to be made on the grounds of impact on an endangered species. The fund, which manages A$8.7 billion of assets sold Lendlease stock worth $11 million, it said Monday. The exit forms part of a growing policy shift among professional money managers. Environmental, social and governance-focused investments worldwide are set to almost double to $34 trillion in 2026 from 2021 levels, according to PwC.
Mining giant Rio Tinto is muscling itself into a position of global dominance in copper production, a key base metal in the world’s transition to green energy, as it ramps up output from its enormous Oyu Tolgoi copper mine in Mongolia’s remote Gobi Desert. The Anglo-Australian miner is pressing ahead with underground extraction, sinking kilometre-deep shafts into the Mongolian desert to mine the huge amounts of copper needed to satisfy demand for green energy technologies as nations rush decarbonise their economies. After settling its long-running differences with the Mongolian government, the miner on Monday began increasing production of copper concentrate from underground ore bodies at Oyu Tolgoi, a milestone that will eventually reach peak production of the critical mineral with 500,000 tonnes a year, making it one of the world’s largest copper mines. Rio has been extracting gold and copper from the mine’s open-cut operations since 2012, but is now proceeding with the more technically challenging task of extracting the mineral from deep underground, unlocking the most valuable part of the mine. Rio’s underground prospect has been beset by a series of long delays and cost blowouts since construction began in 2019, compounded by a long-running dispute with the Mongolian government that ended last year when Rio waived a $US2.4 billion ($3.6 billion) in debt owed by the government. The mine’s expansion was first anticipated to cost $US5.3 billion but is now forecast at $US6.92 billion.
And that’s it for this week. And next week, I’ll be talking to Ian McAdam, the CEO of Capsifi, one of Australia;s leading software providers for enterprise architecture and innovation. And I’ll be talking to Indeed economist Callam Pickering about the latest unemployment figures.
This show was brought to you by Multi-Award Winning Law firm McDonald Legal, experts in the areas of Dispute Resolution and Commercial and Property Law. For a free consultation on your legal matter, McDonald Legal can be reached on 03 9070 1107 or by visiting the website www.mcdonaldlegal.com.au.
In the meantime you can catch me on Facebook, Twitter, Instagram, LinkedIn and YouTube. And if you want leave a comment. For the most exclusive access to leading economists and business leaders from around the world, subscribe to Talking Business on the Apple podcast store or on my website leongettler.com.
Wishing you all a safe and healthy week. And looking forward to bringing you Talking Business next week.
