Australia

Down And Out In Down Under

Zero Hedge,

2 June, 2013

For all the talk China's economic problems are getting (and yes, its official PMI came just slightly ahead of expectations on Saturday printing at 50.8 with consensus looking for 50.0: after all the Politburo can't give the impression of an out of control stall), the real action continues to unfold in its primary derivative economy, that of Australia, and particularly its "China-feeder" resource space, which is a far more accurate indicator of the true demand picture in China than manipulated data out of Beijing.  What is going on there, for those who have not been paying attention, is in one word, a disaster.

CLSA's Damien Kestel summarizes, "As noted in recent weeks it has been happy days for investors enjoying the highs on the S&P 500 and associated rallies across Germany, the UK, Japan and elsewhere. But that joy is a world away from the pain that has been inflicted on the majority of resource related equities and their investors. The AS39 Index on Bloomberg includes 87 mid and (now) small cap Australian resource companies. It has been smashed – just like many of its constituents. From early 2011 it has fallen >65% to now sit at GFC levels while there are plenty of examples of stocks that not so long ago had mkt caps of $800m that are now $50m. The evidence of pain in the resources space is everywhere but probably none more so than in Western Australia, the “engine room of Australia”.

Kestel goes on to compile a page of quotes from "conversations over the past week with friends and associates in the Perth mining game and it brought back memories of the Asian Crisis, Tech bust and of course the GFC."

“We’re seeing a much sharper contraction in the Australian economy than we’d anticipated four or five months ago”. Coffey MD, John Douglas. The engineering group has seen its shares, which traded above $4 in 2007, hit 10c last week.
 

“We’ve still got a lot of construction under way or committed and there’s a lot of activity that will go on for the next three years or so. I think where the question mark comes in my mind is, well, what will follow those projects?”. Western Australia’s Premier, Colin Barnett
 

“Perth has the highest population per capita of self made millionaires in the world”. Extract from a list of fun facts on Western Australia. I dare say there are a few less after the recent carnage in mining stocks.
 

“The current feeling on St George’s Terrace (Perth’s main business street) amongst brokers and miners is that today is worse than the GFC ever was. It’s 100% pain out there” Perth mining investor
 

“I was at the Mines and Money conference in Hong Kong recently. They should really call it Mines and No-Money because no one has any and no one wants to give it to them” Mining CEO
 

“By 10am, the Fitness First gym in the city is packed full of brokers who’ve had a gutful of sitting at their desk doing nothing – salary cuts are starting and next it will be jobs” Perth broker
 

“Oh mate, the funding market is dead. You are now seeing a few deeply discounted rights issues for those that are reaching desperate levels ….. liquidity has completely disappeared” Perth broker
 

“Private equity firms are gearing up for a multi-billion-dollar push into the mining sector, with a wave of proposed asset sales by the big miners, a shortage of competing buyers and the funding headaches faced by smaller companies paving the way for a rise in deals”. The Australian

So, bargain-basement purchasing opportunity, or just the beginning of a secular shift and much more pain to come, as the China "paradigm" finally cracks?

Canary in Coal Mine Gasps as Australia Resource Jobs Fall

Bloomberg,

4 June, 2013

After Mark McGrath lost his job in Sydney in November, he tried to follow the thousands of Australians who headed to the nation’s mines, which have mopped up surplus workers and fueled growth for a decade. Not anymore.

Fired by Royal Dutch Shell Plc (RDSA) after 26 years when the oil company shut its Sydney refinery, McGrath put his home in the suburb of Liverpool up for sale to seek a job in the coal mines of the Hunter Valley, 210 kilometers (130 miles) to the north. He couldn’t find work because the boom in demand for coal, iron ore, gold and oil that supported the economy is waning, adding to unemployment swelled by an ailing manufacturing base.

“Companies won’t hire,” McGrath said by phone from the central coast, separated from his family who are packing up the Liverpool home. “They’ve a lot of contractors working in the pits up here,” he said, who are being let go first.

A drop in hiring of support staff by resources companies is one of the first indicators of a broader downturn because each mining position creates four to five contract jobs in related services, said Martin Whetton, an interest-rate strategist at Nomura Holdings Inc. in Sydney.

“Mining service companies are the canary in the coal mine,” said Whetton. “We’re likely to see higher unemployment over the course of the year.”

The Reserve Bank of Australia predicts the labor market will “remain somewhat subdued” and the government, in its May budget, projected unemployment would rise to 5.75 percent by June 30, 2014, from the current 5.5 percent. That compares with a U.S. jobless rate of 7.5 percent and an average of 8.1 percent for the Organization for Economic Cooperation and Development.

Dollar Drop

The deteriorating job outlook and a slowdown in China, the biggest buyer of the nation’s minerals, have sparked a reappraisal of Australia’s economic prospects, driving the currency 6.8 percent lower in the past month.

That’s too late for some manufacturers who have struggled to compete during the Aussie’s longest streak above parity with the U.S. dollar in 30 years. Ford Motor Co. (F) announced on May 23 it would end production in the country after nine decades, with the loss of 1,200 jobs.

Traders are betting the RBA, which held its benchmark interest rate unchanged at a record-low 2.75 percent after meeting in Sydney today, will in coming months extend cuts to stoke employment, according to swaps data compiled by Bloomberg.

Investment Peak

In the past month, mining support companies Boart Longyear Ltd. (BLY), Transfield Services Ltd. (TSE) and UGL Ltd. (UGL) said the deferral of major projects by large miners in response to falling commodity prices will weaken earnings and spark job cuts. The Bureau of Resources and Energy Economics projected in a May 22 report that investment has peaked after A$150 billion ($146 billion) of mines were delayed or scrapped in the past year.

Xstrata Plc, the world’s biggest thermal-coal exporter, in March shut its office in Brisbane, the capital of Queensland state, after announcing in September that it would cut about 600 jobs. Whitehaven Coal Ltd. (WHC) said March 22 that it would revise a mine plan and lose about 40 workers.

“There’s very low demand for labor at the moment in the coal-mining sector,” said Delphine Cassidy, general manager of corporate affairs at Melbourne-based Skilled Group Ltd. (SKE), a labor contractor that has recruited staff for 50 years and has more than half its business in mining, oil and gas. “Instead of having 30 people on a shift, they’ll probably only put an order for 10.”

Almost one in 10 Australian jobs is tied to resource extraction, twice the level of the mid 2000s, according to an RBA paper released on Feb. 20.

Outlook Sours

Chinese manufacturing indexes showed small businesses struggling, sapping momentum in the biggest market for Australian exports. The official Purchasing Managers’ Index for smaller companies fell to 47.3 in May from 47.6 the previous month, the government said June 1. A private manufacturing index yesterday fell more than forecast to 49.2 in May, an eight-month low, from 50.4. Levels below 50 signal contraction.

The Australian dollar, which held above $1 from mid-June last year to May 10, has declined along with China’s prospects. The currency traded at 97.24 U.S. cents at 3:10 p.m. in Sydney.

That didn’t help Stewart Harris, who spent his entire 23-year working life at Ford and had expected to stay at the automaker till he retired.

“The skill base we have is so specific to this industry,” said Harris, 42, who worked on the final assembly line at Ford, which said it will close its Melbourne and Geelong plants in October 2016. “I don’t know what the future holds for me.”

Ford Cuts

Ford has made cars in Australia since founder Henry Ford began building Model Ts in the country in 1925. It costs the company four times as much to make a car in Australia as it does in its Asian divisions, said Bob Graziano, president of Ford Australia.

In the past, workers like Harris could switch to the mining and energy industries in the nation’s north and west. Now, that door is closing. In the three quarters through February, the resource industry lost 10,600 jobs, according to government data, the worst nine-month stretch since August 2009. Manufacturing has lost 28,900 jobs in the past year.

One resource industry that’s helping mitigate the slowdown is natural gas. The growing popularity of the fuel in Asia is prompting companies including Chevron Corp. (CVX) and ConocoPhillips (COP) to build seven liquefied natural gas projects for almost $200 billion. That’s helped keep Australia’s unemployment rate at between 5 percent and 5.5 percent for 23 of the past 24 months, according to government data.

Gas Projects

Still, construction of Santos Ltd.’s (STO) $18.5 billion Gladstone liquefied natural gas project in Queensland will peak this year, Chief Executive Officer David Knox said in a May 9 speech. More than 7,000 people are working on the development, he said. BG Group Plc’s (BG/) Australian unit said in a May 24 statement it has been hiring more than 15 people a day for six months and 11,600 people are working with the company and its major contractors.

“There had been some pull-back in coal investment plans in the previous year and a significant amount of investment in iron-ore projects had been completed,” the RBA said in minutes of its May policy meeting. “In contrast, a larger share of ongoing mining investment is related to LNG projects.”

McGrath is now working for a labor union helping workers negotiate with management after his four-month quest to land a mining job failed.

“I still know blokes from Shell that haven’t picked up work and are absolutely desperate,” McGrath said. “These guys are looking in the oil and gas industry, but some of them are just so frustrated now and they’ve been to that many interviews. I’m talking blokes that have got 15-to-20 years’ experience.”