Themes of 2013

A couple of stories setting the tone into 2014.  First to the layoffs at tinned fruit company SPC, killed by the high Aussie dollar and competition from China - much like the rest of Australia's non-resources economy, but also involving inefficient workplaces, stifling regulation and political interference:

FEDERAL cabinet has demanded new assurances from Coca-Cola Amatil to justify taxpayer aid for its fruit processing division in another sign of Tony Abbott's hard line on industry assistance.... 

....Cabinet remains broadly reluctant to give the company the cash it seeks and there is "no sense of urgency" to completing the deal, The Australian was told after yesterday revealing the deep concerns about the company's request for public funds (here)

....

...Over the next three years, Simplot will revamp Devonport and upgrade Echuca so that both plants are also efficient. Simplot managers and workers must also adopt the most flexible practices to make this work....So why wouldn't Coles and Woolworths do this for SPC? The simple problem is that the management and workers at SPC are not up to it, and their management and work practices belong to a totally different era. Worse still, SPC makes canned fruit, which consumers no longer want.

A substantial investment is therefore required in a new plant to package fruit in the way supermarket customers want to buy it....The government has appointed some excellent people to look at the SPC problem, but the panel includes Greg Combet. While the deep-seated problems at SPC are not Combet's fault, he played a role in the ALP industrial relations legislation that compounded SPC's problems. (here)

The other news item for which there may be more happening is the overvalued Aussie banks and the question of how much they will need in reserves going forward.  This week, suggesting likely future difficulties, the regulator APRA required the banks to increase their capital reserves.  This was mostly to do with implementation of Basel Committee on Banking Supervision requirements and may not be enough in the event of a sharp downturn:

"It'll be a relief," said Ric Spooner, a Sydney-based trader at broker CMC Markets. "And the actual buffer increase was probably at the lower end of expectations."(here)

Everything is not alright - Australian businesses

So the Chinese economic miracle has come to Australia?  In the form of the mining boom and... the real economy bust... or was that fair competition:

STRUGGLING Australian fruit processor SPC Ardmona has urgently appealed to the Coalition government to give it $25 million promised by Kevin Rudd four weeks ago or risk watching the company go broke. 

SPCA chief executive Peter Kelly said that it was already "five minutes to midnight" and that the Shepparton-based business, despite being owned by giant Coca-Cola Amatil, could not keep going much longer. 

He said SPC, as one of the largest food processing businesses in Australia, had a much brighter future than the moribund Australian car industry and needed much less government assistance. But Mr Kelly bluntly warned yesterday that time was running out. 

"The pain is wearing thin; if this business wasn't owned by CCA we would be shut already," a defiant Mr Kelly said.
"Without ($25m from government) we are in trouble; and that's not just a problem for SPC but for our people, the town, the region and the nation."(here)

One interesting point from the article is the political aspect - who survives depends on who has political connections.  An interesting game indeed!

A great paradox

If Australia's banks are doing so well with so much cash on hand why is the Federal government introducing a backstop liquidity regime? 

On the one hand there is giant CBA of the big four announcing big profits and dividends:

COMMONWEALTH Bank is expected to post a record $7.6 billion full-year cash profit and potentially reward shareholders with a special dividend as the reporting season kicks into gear this week. 

With the chase for yield pushing the banks' share prices to record highs, CBA's capital management will be closely watched ahead of quarterly trading updates from rivals ANZ on Friday and National Australia Bank next week. ANZ, like NAB and Westpac, has a September 30 year-end date.(here)

But the international media smells a sector which is overvalued, overexposed and lacking growth potential:

Higher payouts signal confidence, but they also imply managers have no better use for the cash. That leaves the big four trading at a whopping two times book value. CBA, by far the largest and now seventh-biggest in the world by market capitalisation at $107bn, is trading on 2.7 times book, which can only be considered extreme for a bank with four-fifths of its loan book in its home market, where economic growth is slowing and government finances are worsening.
Australia’s banks have for five years been a great bet, with price gains of two-fifths compared with a tenth for US banks and a one-third loss in Europe. But the best is past. Returns on equity over that time have slipped by a sixth while those lumpy loan books – which have not been tempered by a housing market downturn, cannot deliver the profits growth implied by their rating. The return of capital implies the banks themselves cannot see value in seeking growth, either.(here)

While Australian regulators seem to be preparing for a liquidity crunch while analysts point to a possible trigger for recession from China.  Anyone with some alternatives?

Step back from CMBS support

...Australia will stop buying mortgage bonds as a revival in the market means the government’s support is no longer needed, according to Treasurer Wayne Swan.

The cost of issuing residential mortgage-backed securities has recovered since the credit freeze in 2008 that prompted the creation of the government’s RMBS program, Swan said in the text of a speech to be delivered today at the Bloomberg Australia Economic Summit in Sydney. Although it doesn’t plan new purchases, the government won’t sell the securities it owns in the near future, he said....

...The Australian Office of Financial Management, which administers the RMBS program, has spent A$15.5 billion of its A$20 billion budget, according to information on its website. The program aimed to spur competition in the nation’s home loan market by helping smaller lenders fund themselves.... (here)

Australia avoids the currency war at its peril

Terry McCrann has put it best in a refreshing piece in the Sun-Herald:

....AUSTRALIA is caught smack in the middle of a real live shooting war. Even if it's not bullets and bombs that are being fired.The overwhelming majority of Australians don't know it's going on. And if they did, they'd probably think it was good news for them....And up to a point, they'd be right. Trouble is, "that point" was reached some time last year. Until then, we were beneficiaries. Now we're at risk of becoming - serious - collateral damage....It's the global currency war. Everybody has been trying to weaken their currency to boost their own economy. In echoes of the trade wars of the 1930s - stuff everybody else...

...So how it plays out from here, is critical to everything that impacts on your financial and economic wellbeing. Property prices. Interest rates. Inflation. The stock market. Superannuation. Whether you have a job. Which businesses thrive, which ones shrivel....In recent weeks, the Aussie dollar has drifted in something of a backwater around $US1.03....  The RBA might not seem too fussed. But it is very, very fussed. (here).

Alan Kohler had a good piece looking at the role of Japan and the inability of the Australian government to do anything meaningful.  Are you paying attention Wayne?

...In this context, the Labor Government's "industry and innovation" plan this week is a drop in the ocean, not that anyone expects a big dollop of deficit spending to support manufacturing, or expects the Reserve Bank of Australia to join the currency wars and target higher inflation....

The RBA and the ALP have done what they can. The cash rate is now as low as it's been for 40 years and despite some problems with unionised construction, wage costs overall are not really a problem.....But despite record low interest rates, monetary conditions for Australian businesses are at a record high.....That's because the transmission mechanism between interest rates and the exchange rate has broken down, in turn because of three waves of quantitative easing by first the US, then Europe and now Japan....Japan, straw, camel's back (here).