Pete Wargent blogspot

Co-founder & CEO of AllenWargent property advisory & buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place) - clients include hedge funds, resi funds, & private investors.

4 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the better property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

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Sunday, 8 September 2013

Rio Tinto: further hints about the road ahead

I've been busy doing other things for the last few weeks, so hadn't taken any time to read the Rio Tinto (RIO) presentation of its interim results.

BHP Billiton's recent ASX release showed a clear trend - falling capital expenditure for the year ahead and an increase in production.

Rio's 2013 interim results and presentation showed a similar picture.

The first half results show that Rio attained record levels of production and sales of iron ore.

But the first half also showed that capital expenditure was $668 million lower than the corresponding prior period for 2012. 

With four major projects completed by Rio Tinto this year, full year capex is forecast to be 20% below that of 2012 - the mining capex boom has passed its peak.

Source: ASX

Rio's results showed solid underlying earnings in spite of weaker commodity prices.

The colossal Pilbara iron ore 290Mt/a expansion is approaching completion, with first tonnes expected this month, and there is potential for capacity growth to go up to 360MT/a.

What this means?

Firstly, as has already been noted, capital expenditure across Australia is likely to drop off sharply over the next couple of years. 

Production of iron ore is clearly ramping up, so there will be some nerves around how the commodity price holds up and whether demand from China continues to increase at its forecast levels.

This is a fairly neat microcosm of the wider economy: capex falling sharply (this also has a negative effect on imports - we're bringing in less construction equipment), production and mineral exports ramping up, but with a heavy reliance on robust commodity prices.

Slowing economy

The recent GDP figures showing 0.6%q/q growth weren't disastrous, but they were hardly inspiring.

Households are still saving at around a 10% rate. Retail sales remain weak. And, the economy has not been strong enough to prevent the unemployment rate from ticking up to 5.7%.

Mineral exports are increasing, it's true, but fast enough to plug the capex gap?

Dwelling construction, which is supposed to fill that forthcoming 'hole' in our national accounts, has increased over the year to June, but only by around 4%. OK, that's an improvement but it's hardly likely to represent a smooth baton-change.

With the dollar stubbornly back up to nearly 92 cents, inflation expected to remain benign and growth looking set to remain sub-trend for an extended period of time - in the normal course of events - you would have to think that another interest rate cut is on the cards to just 2.25%.

Barrier to a rate cut?

There is one thorny issue, though.

Property commentators are continually guilty of placing way too much emphasis on the property markets when it comes to monetary policy, but for once, dwelling prices may indeed have a key role to play.

According to RP Data, median dwelling prices are up ~6.5% q/q in Sydney and ~6.3% q/q in Melbourne.

I have no doubt that the Reserve Bank had hoped for a pick up in house prices in order to avert a more dramatic economic downturn, but if that level of price growth continues another rate cut would seem imprudent.

So, it seems as though we are back to where we were.

The RBA will sit pat for the time being and in the time-honoured spirit of the eternal optimist Mr. Wilkins Micawber, hope that "something will turn up" such as increasing commodity prices or a strengthening US dollar.