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Firetrail Weekly | Three things that got the team talking this week

Firetrail Weekly | Three things that got the team talking this week

 

October 15 2021

 
 
1. Job hunt…

As we reopen in NSW, looks like there is lots of jobs going in retail/hospitality, and no one to fill them!

 
2. Housing speed limit…

APRA recently adjusted their home loan serviceability assessments to use an interest rate buffer of 3% p.a., up from 2.5% p.a. previously, which is likely to reduce borrowing capacity for certain home loan applications. This comes as 65% of new home loans funded have a debt-to-income ratio (DTI) > 4x (and 22% > 6x). the average home loan size has also passed 7x the median household income.

 
3. Short on supply…

Supply-chain issues were once again in focus this week, with President Biden even holding a press conference to address the matter and initiatives they are taking to try and ease the bottlenecks. We have rounded up some news items from the week showing how widespread supply issues are:

  • Cotton prices surged to a 10-year high as extreme weather (droughts and heat waves) has wiped out cotton crops across the US, who are the biggest exporter of the commodity in the world. So far higher costs are being passed along to consumers as manufacturers and retailers have pricing power, including Levi Strauss.   
  • Cotton futures could pressure margins for smaller Australian retailers, like Kmart. Although judging by the lines outside their stores on Freedom Day (see picture below) customers may also be willing to pay up.    
  • The ASOS CEO left with immediate effect as the company warned supply chain pressures and consumers returning to pre-pandemic behaviour could reduce 2022 profit by >40%
  • Coffee farmers in Colombia, the world’s #2 arabica producer, have failed to deliver up to 1m bags of beans this year or nearly 10% of the country’s crop, leaving exporters, traders and roasters facing steep losses. World coffee prices have soared 55% this year, mainly due to adverse weather in top producer Brazil.
  • Apple is expected to slash iPhone production by 10M phones due to the global chips shortage
  • Lebanon suffered a 24-hour blackout over the weekend as the country’s 2 main power stations were shut down due to fuel shortages.

Firetrail Weekly | Three things that got the team talking this week

Firetrail Weekly | Three things that got the team talking this week

 

October 8 2021

 
 
1. Back on the job…

SEEK job ads have bounced back in Sydney as we prepare for ‘freedom day’ and Statewide reopening. The number of new job ads posted on SEEK’s Australian website rose 6% m/m in September, including a 10% m/m rebound in New South Wales. Roy Morgan’s Australian household survey for September also revealed a rise in employment (and decline in unemployment). Meanwhile US small businesses cannot fill their vacant positions!

 
2. Cap rate slide…

Demand for Industrial property assets is hot. Over the last fortnight alone we’ve had Centuria buy $351mn of industrial assets (4.23% cap rate) and Dexus acquiring A$1.5bn of industrial assets and development land (4.7% cap rate). Most transactions are now neutral to dilutive. As such, this doesn’t look to be a good environment to be chasing assets – especially with Central Banks turning more hawkish.  

Source: Jarden

 
3. Shipping costs surge…

As warehouses get harder to find, we seem to also have entered ‘Containergeddon’, as shipping costs continue to skyrocket. As shown in the chart below, giant capesize vessels are now earning more than $80,000 a day, the highest since 2009, as a rush for ships outstrips supply. With demand for energy set to continue climbing this Northern Hemisphere winter, the outlook for the entire dry bulk shipping market is strong.

Retailers such as Walmart, US Target, Home Depot and Costco have taken measures into their own hands by chartering proprietary vessels to make sure Holiday deliveries arrive on time. Recent updates suggest 60 container ships carrying clothing, furniture and electronics are stuck off LA, the number 1 US port complex. Pre-Covid it was unusual for more than one ship to be waiting. Black Friday kicks off holiday season shopping on November 26.

Source: Baltic Exchange, Bloomberg

Firetrail Weekly | Three things that got the team talking this week

Firetrail Weekly | Three things that got the team talking this week

 

October 1 2021

 
 
1. Housing heading higher…

CoreLogic’s latest data shows Australian house prices climbed 1.5% on average in September, with Sydney homes up 1.9%. The gains take average housing values 20.3% higher over the past year and 17.6% higher in 2021. The annual growth rate is the fastest since 1989.

Meanwhile the number of residential building approvals in Australia bounced in August, with detached house and higher-density approvals both higher. Total housing approvals are now up 31% y/y, and detached up 24% y/y.   

Source: UBS, CoreLogic

 
2. Environmental compliance dilemma…

China is continuing to assess the environmental impacts of its industries. This week we saw China announce they would move from 6 SOE Rare Earth producers to 2 – one in the North and one in the South. The merger is believed to have been driven by environmental compliance. This is big news, and should be a positive for NdPr pricing, which portfolio company Lynas produce.

It comes as China’s demand for thermal power has never been higher, due to their strong economic recovery post Covid. We’ve heard reports some employers are asking employees to turn off air conditioning, computer monitors and the lights to conserve energy, as Chinese utilities accelerate efforts to secure LNG supplies in preparation for winter. In Jilin province, which suffered blackouts over the weekend, they are seeking more coal import quotas as they look to boost inbound shipment.

Source: Bloomberg

 
3. The road to post-Covid…

As we sprint towards reopening, we had news NSW will trial allowing international students back into Aus (via special quarantine accommodation). Students must be fully vaccinated with a TGA-approved vaccine, which only includes Pfizer, Moderna, AZ and Johnson & Johnson. This will narrow the field of eligible students allowed to enter Aus, but may help with stretched labour conditions heading into the Summer hospitality season. You might even be able to find a babysitter for when the pubs open!

Firetrail Weekly | Three things that got the team talking this week

Firetrail Weekly | Three things that got the team talking this week

 

September 24 2021

 
 
1. Covid support…

Australia’s preliminary September PMIs improved a little, including the new orders components, which again shows the resilience of the labour market through lockdown. And the governments disaster payments have certainly helped, particularly in NSW. Businesses in NSW have received at least $5.3bn in government grants since 19 July (plus other relief for rents, payroll tax, etc). A further $5.5bn has been paid in income support to individuals losing hours of work. Combined, these payments are equivalent to ~7% of NSWs quarterly Gross State Product!

2. Labour outlook…

Fedex reported their 1Q results this week and provided a sobering outlook on labour. Labour inflation is the biggest issue facing the business, with wages up double digits. FEDEX Ground division workers are receiving 16% more than a year ago, and at FEDEX Express locations workers received a 25% increase. The competition for talent in front line workers has driven the wage rates and pay premiums. Portland, Oregon is reportedly running at 65% capacity due to lack of staff, as US parcels are forecast to grow 10%pa to 2026.

This is positive news for portfolio company Seek, as job ad numbers continue to track strongly with September averaging 186k, up slightly on 185k in August

Source: Firetrail, SEEK

3. Europe’s energy crisis…

Global energy prices are skyrocketing due to supply issues, low wind generation and a warm summer in the Northern Hemisphere. The price of natural gas, coal and most commodities you can use for heating and electricity is through the roof. Market participants are on high alert going into winter when utilities typically like to buy stocks of coal and gas just in case winter is extra cold!

There is also a CO2 shortage! Soaring natural gas prices have forced closures of fertiliser plants, the UK’s main source of CO2 used to make drinks fizzy, stun animals for slaughter and cool nuclear power plants.

There are 3 main implications to consider:

  1. Some UK electricity retailers have ceased trading and likely to announce bankruptcy
  2. Government and regulators are redistributing generator super profits to Government and customers
  3. Electricity bills are going up for consumers and manufacturers

The worst case scenario is blackouts. In the 1970s, the UK created a 3 day working week to conserve electricity! Winter is coming…

Firetrail Weekly | Three things that got the team talking this week

Firetrail Weekly | Three things that got the team talking this week

 

September 17 2021

 
 
1. Better business conditions…

NAB’s measure of Australian business conditions rose modestly in August, despite half the country being in lockdown. Encouragingly, firms’ reported forward orders increased in August. The monthly measure of Australian consumer confidence also rose a little in September, as more clarity was received on the end of lockdowns.  

Source: ABS, ANZ-Roy Morgan, Westpac & Melbourne Institute, Macquarie

2. Plastics soar…

Petrochemical prices are soaring along with demand for all types of plastics as the world continues to recover from the pandemic. Prices for PVC suspension polymer in Germany are now about 30% higher than their previous peak in 2012. Alongside the recovery in fuel use, rising demand for plastics is adding to the upward pressure on oil prices. This news follows a solid result recently from portfolio company Amcor, who has been able to pass through the higher raw material costs.

Source: Bloomberg

3. The sunshine state…

Queensland remains the most hesitant state to get vaccinated, but that hasn’t seemed to stop interstate migration. As Australia’s population growth slowed to just 0.1% y/y this year, Queensland has seen the largest net interstate migration in around 15 years.

Source: Melbourne Institute, ABS, Macquarie Macro Strategy

Firetrail Weekly | Three things that got the team talking this week

Firetrail Weekly | Three things that got the team talking this week

 

September 10 2021

 
 
1. Excess cash…

There is $250bn excess cash across both consumer ($100bn) and business ($150bn) that has built up in Australia since Covid started. Lockdowns only see the deposits grow. Looks like we are set for some good Christmas presents this year! 

2. Lockdown labour…

Payroll jobs in NSW have clearly been the weakest across Australia as we continue in lockdown. They have fallen 8.7% since the peak, slightly bigger than the fall during the initial lockdown in March/April last year. Payroll jobs in Victoria are yet to fully reflect the lockdown in that state.

ANZ’s job ads series for Australia declined just 2.5% m/m in August and was 3.7% lower than the level in June. This resilience is shown in the SEEK Job Ads data, showing evidence of labour hoarding.

Source: ABS, SEEK, Macquarie Macro Strategy

3. Retail sales trends…

July retail sales declined -2.7% m/m and -3.1% y/y as impacts of widespread lockdowns were realised. Meanwhile online sales reached a record monthly high of $3.7bn. Total online penetration has also reached record levels at 12.6%.