The Israel-Hamas war sends Aussie petrol prices skyrocketing
Welcome to Talking Business, a podcast produced in Melbourne Australia. The podcast is available on the Acast site, my own website, the Apple Podcast store or wherever you go to get your podcasts. Or you can get it at the Business Acumen website at www.businessacumen.biz or at Banking Day.
For the most exclusive access to leading economists and business leaders from around the world, subscribe to Talking Business from my website leongettler.com.
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 37 in our series for 2023 and today’s date is Friday October 13.
First I’ll be talking to Robert Wilkinson, the CEO of Cyber Marathon Solutions about cyber security.
And I’ll be talking to Rabobank economist Michael Every about China’s economic and market challenges.
But first, let’s talk to Robert Wilkinson
So what’s happening in the news.
Australians devote a greater share of their income to mortgage repayments than any other advanced economy, the IMF has revealed, as it downgraded its forecasts for the local economy and warned inflation will be higher than previously thought. In its latest World Economic Outlook, the IMF said chances of a hard landing for the global economy had receded, as the world remained on track for a soft landing scenario where inflation returned to central bank targets without a major downturn in activity. In a new analysis released on Tuesday, the IMF showed that debt servicing ratios had increased sharply in economies like Australia where the majority of households had variable rate mortgages. The share of income lost to mortgage repayments will have increased further since the period examined by the IMF, with the cash rate now 1 percentage point higher than December 2022. “While higher mortgage rates and lower affordability have suppressed demand, supply constraints have nonetheless contributed to keeping house prices above pre-pandemic levels in several countries and complicating central bank efforts to bring inflation back to target,” the IMF said. The IMF also revealed on Tuesday it expects the Australian economy to expand by just 1.2% next year – less than predicted population growth – down from its previous forecast of 1.7%. The projections were broadly in line with the most recent forecasts from the RBA, which predict the economy will expand by 1.25 per cent next year as high interest rates cause a slowdown in consumer and business spending. The IMF expects unemployment to rise to 4.3% from its current rate of 3.7% as growth slows. Meanwhile, inflation will be higher than the IMF previously thought. Headline inflation is expected to average 4% next year, well above the 3.2% forecast contained in its April projections and above the RBA’s official inflation forecast.
Australian supply chains are underfunded and poorly prepared than global peers to handle new challenges threatening to cause fresh disruption after upheaval during the pandemic. Supply chains across the country remain focused on building resilience after Covid-19, but KPMG has found that they are lacking investment needed to handle disruptions in the future stemming from inflation, freight costs, geopolitical conflicts and a rise in ESG requirements. Despite Australia’s domestic and logistics industry having access to a highly skilled workforce and a reasonable quality of infrastructure assets, KPMG head of global supply chain Peter Liddell said local supply chains were below global standards due to highly manual and inefficient practices. Over the longer term, KPMG expects substantial growth in businesses taking up advanced robotics and automation, expanding the range of activities these tools will perform across the supply chain. The firm also saw generative AI models as having the potential to transform businesses through automating and executing tasks with speed and efficiency. Liddell added that while local supply chains were withstanding current pressures stemming from the pandemic, Australia while behind the curve was starting to have conversations around using generative AI models to accelerate the quality of data and decisions making.
The crisis at Qantas is set to hang over the upcoming flood of annual shareholder meetings, as investors look to dial up the pressure on companies to meet their social and environmental goals while churning out big profits. October kicks off the Australian annual general meeting season, when shareholders get a chance to question the boards of our largest listed companies, and vote on director appointments and executive pay packets. Debates about how companies trade off different interests – such as meeting the needs of customers, staff, the environment, and shareholders – are never far from the surface at general meetings. But this year, the rolling reputation crisis at Qantas – and the demand for accountability from its board of directors – is likely to bring corporate accountability to the fore. Governance experts and investors say the turbulence around Qantas also underlines the importance of “social licence” – the idea that companies operate with an informal agreement with the wider public that their activities are acceptable. Australian Eagle Asset Management’s chief investment officer, Sean Sequeira, said social licence had been a focus for all companies for some time but that concerted scrutiny of the Qantas board had again brought the issue into the limelight. “Qantas’ social licence will be a focus because of all the news stories and because the company is going through a challenge with it now,” Sequeira said. “But the focus will absolutely extend across all companies.”
Australia’s competition regulator has approved Brookfield and EIG’s $18.7bn takeover bid for Origin Energy, with the deal widely seen as critical for the country’s renewable energy aspirations. The decision of the Australian Consumer & Competition Commission had been seen on a knife’s edge, with the regulator signalling it had concerns about Brookfield’s ownership of AusNet, Victoria’s principal electricity transmission network. The ACCC has highlighted the possibility that Origin could secure access to transmission infrastructure that gives it a commercial advantage, a claim denied by the bidding consortium. Brookfield and EIG offered a spate of concessions, most notably ring-fencing AusNet, and the ACCC on Tuesday gave the deal the rubber stamp but with conditional behaviour requirements. ACCC chair Gina Cass-Gottlieb said the regulator remains concerned about Brookfield’s ownership of AusNet, but had determined the public interest of Canadian private equity’s promised investment outweighed those worries. The future of Origin is widely seen as a watershed moment for Australia’s energy transition, as Brookfield promises to spend between $20bn and $30bn to develop much-needed renewable energy generation projects. The deal must now win favour with shareholders, several of whom have declared they oppose the value of the price offered by the consortium. To succeed, the bid requires the support of more than 75% of votes cast. AustralianSuper and Perpetual – both of whom have said they believe the Brookfield and EIG offer is too low, holds more than 15% of Origin, leaving little wriggle room for the bidding consortium.
Virgin Australia has recorded its first annual profit in more than a decade after its revenue more than doubled as the airline prepares to relist on the Australian stock exchange next year. In documents filed with the Australian Securities and Investments Commission on Tuesday, Virgin said its net profit after tax was $129 million, from revenue of $5 billion in the year to June 30, up 124%..Chief executive Jayne Hrdlicka said it had been 11 years since Virgin Australia returned a profit, but warned the airline is part-way through a multi-year recovery. Virgin’s underlying earnings before interest and tax swelled to $439 million and EBIT margins sat at 8.8%, with its airline margins across domestic, regional and international reaching 7.4%. Virgin said margins were 5% and revenue was around $2.5 billion. By comparison, Qantas’ underlying earnings hit a record $2.47 billion in the same period and its domestic margins were 18.1 per cent, while international margins climbed to a record 13%. Virgin said there had been a continued recovery in the aviation sector during the year, but high demand for travel and supply chains were normalising, helping to deliver some improvement in reliability and operational stability. Virgin’s on-time performance has improved, but remains lower than Qantas and Jetstar as it grapples with staffing, weather and air traffic control issues. It said it paid eligible frontline team members – who forewent bonuses during the administration period – 6.5 per cent of their salaries in additional bonuses, totalling $26 million.
A new sustainable infrastructure fund backed by German investment firm Patrizia and Japanese trading giant Mitsui has completed its maiden investment, committing at least $70m towards a solar and battery development program across Australia. The APAC Sustainable Infrastructure Fund (A-SIF) launched in January with a mandate to invest in infrastructure assets across the Asia-Pacific region, include solar and wind farms, battery storage, data centres, healthcare and education facilities. Its first investment comprises the acquisition of an equity stake in South Australian renewable energy company YES Group and a commitment to fund YES Group’s development of predominantly sub-5MW solar generation and battery storage projects. The portfolio is targeting a renewable generation capacity of more than 150MW once fully operational, delivering green power to about 65,000 households. YES Group was established by Mark Yates in 2004, and over the past five years has developed and built more than 120 solar farms in the sub-5MW market, managing 100% of the renewable energy offtake through its YES Energy retail business. It has also developed other renewables.
High prices at the petrol bowser will further crimp consumer spending and squeeze profit margins, as companies are forced to absorb higher input costs rather than pass them on to consumers, according to economists. That outcome would ensure the recent increase in global oil prices, which along with the weak Australian dollar has pushed petrol prices beyond $2 a litre, do not flow through broadly to consumer inflation. AMP Capital chief economist Shane Oliver said the economic situation in Australia and overseas today was very different to when prices last spiked following Russia’s illegal invasion of Ukraine in February 2022. “Then many commodities and prices were up with supply shortfalls, people wore it as they were happy to be free from lockdowns and monetary policy was easy,” Mr Oliver said. “Now many other commodity prices are down, goods prices have generally weakened, reopening euphoria has long faded, and monetary policy is tight which has hit households.” Average weekly petrol prices hit a 12-month high $2.11 in the final fortnight of September, rising sharply from a 12-month low of $1.74 in July. Mr Oliver expects that would add 0.3 percentage points to September quarter inflation figures due to be released on October 25. The increases came as the global oil cartel OPEC+ led by Saudi Arabia and Russia tried to limit production to push global oil prices closer to $US100. ANZ chief economist Richard Yetsenga agreed that with a cash rate of 4.1% today versus 0.1% two years ago, increases in petrol prices created very different spending and inflation dynamics. “An increase today is much more likely to reduce demand than stoke inflation,” Mr Yetsenga said, adding, however, it was still an open question how businesses dealt with higher input costs. “Businesses absorb as much as they can, and it cuts profits, or they try to pass it on, and it cuts demand. Either will take income out of the economy.” Treasury believes as demand falls and competition heats up, businesses will be forced to absorb costs into margins. While booming consumer demand unpinned by massive pandemic-era stimulus helped drive record levels of spending during 2022, which in turn allowed many local companies to largely pass on surging input costs and wages to maintain profit margins, that will become increasingly difficult. “The forecast economic headwinds will limit profits in most industries,” Treasury’s head of macroeconomics division, Dr Sarah Hunter wrote in a briefing note to Treasurer Jim Chalmers earlier this year.
Crude prices surged to as high as $89 a barrel on Monday over concerns that Hamas’s attack on Israel will increase tension across the Middle East and affect output from leading oil producers. Brent, the international oil benchmark, jumped as much as 5.2% in early trading in Asia, before steadying to trade 3.8% higher at $87.83. WTI, its US counterpart, rose 4% to $86.07. The jumps have revived fears of another prolonged period of high prices that would fuel inflation in many parts of the world. Supply cuts by major producers Saudi Arabia and Russia had pushed Brent above $97 a barrel at the end of September, before prices dropped 11% last week amid concerns about slowing global growth.
The Albanese government denied Qatar Airways more flights into Australia to protect Qantas’ market share and keep airfares high, a Senate Committee has suggested. The committee chaired by Nationals Senator Bridget McKenzie delivered its report on Monday, after an intensive fortnight of public hearings examining the decision to refuse Qatar Airways an extra 28 flights a week. Ten recommendations were made by the Committee, including a call for the government to conduct an immediate review of the decision. Other recommendations sought the reinstatement of quarterly airline monitoring reports, and an Australian Competition and Consumer Commission inquiry into anti-competitive behaviour in the domestic aviation market. The committee also wanted consumer protection measures developed to assist travellers subjected to significant flight delays and cancellations, lost luggage and devaluation of loyalty programs. It was recommended the government urgently respond to a two-year-old review of Sydney Airport’s demand management system, to address claims of “slot hoarding” and aid with flight recovery after periods of disruption.
The big four banks have made more than 2000 workers redundant this year as they tighten their belts in response to growing cost pressures. Westpac has led the charge with more than 1080 jibs cut, according to the Finance Sector Union. An analysis of the union’s press releases since the start of the year indicates that Commonwealth Bank has followed up with close to 600 job cuts, while National Australia Bank has made about 340 staff redundant since January, The FSU did not have comprehensive numbers for ANZ. However, its half-year results show that in the year to March it reduced its full-time equivalent staff by more than 350. The statistics come ahead of three of the major banks – Westpac, ANZ and NAB – reporting their full-year results next month, where cost inflation is expected to be a focal point for investors and analysts.
The stuttering energy transition is forcing big industrial companies like Boral to temporarily shut down cement production to avoid peak electricity prices, putting at risk the nation’s build-out of housing and infrastructure stock. Boral CEO Vik Bansal said he was “extremely nervous” government plans to build housing, hospitals and even infrastructure for the Brisbane Olympic Games were vulnerable to an energy market that was at times incentivising the nation’s biggest cement maker to down tools. The revelation that one of the country’s key manufacturers was regularly curtailing production in response to electricity prices comes amid calls from several quarters for Australia to set up advanced manufacturing to better tap its abundant resources of critical minerals. It also comes as the national energy market operator stepped up calls on project developers to push projects through to construction to get Australia’s energy transition back on track. One hurdle is that big industrial players – including Boral – were unwilling to sign up to the long-term contracts, sometimes lasting as long as 20 years, that were required to underpin the economics of projects because of uncertainty around future supply and prices. Australian Energy Regulator chairman Clare Savage said there were more undeveloped energy projects “in the pipeline” than existing power generation assets, but calls to rapidly accelerate them must be tempered by the need to secure community support and keep costs down.
Winning public support to install 10,000 kilometres of new power transmission lines in Australia is a key challenge for a shift to renewables, according to the country’s energy market operator. The rush to shutter aging coal-fired power plants and replace them with renewable generation assets is already putting pressure on electricity infrastructure and upgrades are needed, Daniel Westerman, chief executive officer of the Australian Energy Market Operator said on Monday in a speech. Prime Minister Anthony Albanese’s A$20 billion ($13 billion) program to modernize Australia’s grid to enable greater use of clean energy sources will require a major effort to win the community’s consent, he said. That strategy is based on AEMO’s forecasts that the country’s energy transition will require 10,000 kilometres of new transmission lines by 2050.
And that’s it for this week. And next week, I’ll be talking to LiveScore Group’s General Counsel Member Rani Wynn about the increasing opportunity for women in the Sport and Gaming industry.
And I’ll be talking to economist Saul Eslake.
For the most exclusive access to leading economists and business leaders from around the world, subscribe to Talking Business from my website leongettler.com.
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Wishing you all a safe and healthy week. And looking forward to bringing you Talking Business next week
