The latest insolvency figures from ASIC’ external administration appointments statistics from February 2015 show:
- The number of companies entering external administration across Australia increased to 655 in February versus 484 in January.
- All states and the territories saw a rise in external administration appointments over the month:
- New South Wales:
- up to 240 from 155 in January.
- down to 71 from 142 in January.
- The Australian Capital Territory (ACT):
- up to 18 companies entered external administration from 8 in January.
- Overall, these increases are in line with previous years and part of the cyclical nature of appointments.
- Economic Influences:
- The Reserve Bank of Australia (RBA) cut the cash rate by 25 basis points in February to a new record low of 2.25%. It was the first time the RBA had cut rates since August 2013. RBA Governor Glenn Stevens said the economy was likely to be operating with a degree of spare capacity for some time, adding that its action was “expected to add some further support to demand, so as to foster sustainable growth and inflation outcomes consistent with the target.”The RBA’s rate cut gave consumer sentiment a boost, with the Westpac Melbourne Institute Index of Consumer Sentiment recording an 8% increase month-on-month from 93.2 in January to 100.7 in February.This is the highest level reached by the index since January 2014.In its monthly survey, National Australia Bank (NAB) said the RBA’s rate cut did not have the desired effect, with business confidence deteriorating in the month.The index is at its lowest level since before the 2013 Federal election, with political and economic uncertainty big factors in the result.In terms of sectors, mining and retail reported the largest declines. Business conditions remained unchanged in the month, with some improvement seen in manufacturing and construction.
- The services sector moved into positive territory on the AIG index in February for the first time in a year.The Australian Performance of Services Index rose 1.8 points to 51.7 points, with growth recorded in the healthcare, community, finance and insurance sectors.Manufacturing was hit by weak domestic demand, recording a third month of contraction in conditions.The Australian PMI fell 3.6 points to 45.4 points in February. Softer conditions in construction saw a 2.0 point fall to 43.9 points — a fourth consecutive month of contraction (a below 50 point reading) for the sector.
- The number of new homes approved for construction eased 3.2% in February to 18,768 (seasonally adjusted) but were still 14.3% higher than the number of homes approved in February 2014, according to the Australian Bureau of Statistics figures.
- Unemployment in Australia fell from 6.4% to 6.3% in February (seasonally adjusted), with 15,600 more people in work compared to January. Meanwhile job advertisements rose 0.9% in February (seasonally adjusted) — the ninth consecutive monthly rise. Job ads are up 10.2% over the year to February.
- New car sales rose 2.9% (seasonally adjusted) to 95,737, according to figures released by the ABS.
- February’s retail trade figures showed a slight improvement in sales of 0.7% in the month (seasonally adjusted) to AU$24.06 billion.
- Falling commodity prices have seriously impacted Australian miners – Commodities are seeing their biggest annual falls since 2008 — collapsing oil and bulk commodity prices and a slowdown of growth in China are all contributing to the slump.Consequently, measures have had to be taken by mining companies, and we’ve seen reductions in operating costs and capital expenditure, operational reviews and revised mine plans.There have also been cuts to the level and value of contract work on-site.Companies overladen with debt amid falling commodity prices have been hardest hit and we’ve seen a number of companies fall into administration as a result.It has generally been a more difficult time for producers than explorers.Explorers are able to cut back on exploration, cut costs and staff and wait out the cycle, but producers have to keep their operations going, which presents a more difficult situation.Those companies with proven production and operational mines are likely to be a more attractive investment as investors shy away from speculative, high-risk stocks.
In general, it’s a more difficult time for smaller producers than larger ones with smaller miners often needing higher commodity prices to stay viable.
Cost cutting activity and operational reviews have enabled some companies to stay ahead of costs in this environment, but in some circumstances the rate of decline in commodity prices has moved too quickly for companies to cut costs in time.
In these circumstances, we are seeing a number of mine closures as well as a few insolvencies.
- Have commodity prices reached the bottom of the cycle?At the moment there is mixed consensus about this in the market with some commentators calling the bottom and others predicting further price falls ahead.There is also some thought that recovery will be seen in gold and base metals such as copper, nickel and zinc, sooner than coal and iron ore.Iron ore prices have recently slumped below US$50 per tonne (six-year low) and some forecasters believe prices will hit US$40 per tonne before a floor is found.
- What trends are we seeing with regards to mining investment in Australia?Mining investment had been a key driver of growth in Australia for a number of years.Companies have had to cut staff and expansion programs, and reign in capital expenditure.Exploration plans are being scrapped, with expenditure in that area now at the low levels last seen in 2008.The RBA cut rates early in the year to try and boost confidence and it has conceded that further easing of policy may be appropriate over the period ahead. Industry research provider BIS Shrapnel reported in late- 2014 that Australia was going to experience its ‘biggest ever’ slump in mining investment activity — falling 40% — over the next four years, and not stabilising until 2017.One of the key themes at this time is the lack of interest from the retail investment community in junior mining stocks and the consequent flow on to institutional investors losing interest in the sector.
- Are there any signs of a turnaround?The dramatic fall of iron ore prices has rocked industry sentiment and pressured the market, and has also forced questions about slowing steel consumption in China, and its economic growth overall, and whether the major producers should curb expansion in an oversupplied market.Recently, the Australian Government’s Department of Industry downgraded iron ore forecasts for 2015 by a further 5% to US$60 per tonne.In mid-April the Federal Treasurer, Joe Hockey, said the Government was contemplating forecasted prices as low as US$35 per tonne.It is not all doom and gloom for resource stocks, with the easing cost pressures in Australia’s mining industry potentially positive, certainly for mid-tier miners.On the gold front, with the gold price coming back up on the Australian dollar side, costs coming down and turnover in the workforce dropping, companies are once again becoming globally competitive.
- What is the state of China’s demand for commodities?In 2014, China reported its slowest economic growth in over 20 years.Steel production has contracted and some of China’s steel mills are reportedly preparing to close.As such the outlook for demand and prices for base metals and bulk commodities in China have been cut as well.Chinese seasonal demand for commodities is normally highest in the first quarter of the year, but to date it has failed to manifest.A recent report by Barclays on China’s commodity demand in the next five years points to a focus on lessening pollution and increasing renewable, clean energy sources — which would see coal and oil consumption drop dramatically. It says China will become less competitive in global manufacturing but less polluting.The report says China’s share of the global gold market could rise sharply as it is one of the few countries where demand is likely to continue expanding over the next five years.
By 2020, China could be consuming nearly 50% of global gold output. NAB believes China is now focused on quality of growth rather than quantity.
It forecasts China’s economic growth at 7.1% in 2015 and 6.9% in 2016
- Outlook on the broader market and its potential impacts on insolvency levels:
- The RBA surprised financial markets by holding rates at 2.25% in April for the second consecutive month.
- In its statement, RBA Governor Glenn Stevens pointed to the need for a weaker currency to achieve balanced growth in the economy. The RBA said it deemed it “appropriate to hold interest rates steady for the time being.” It added: “Further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target.”
- The Westpac Melbourne Institute Index of Consumer Sentiment declined by 1.2% in March from 100.7 in February to 99.5 in March. Westpac Economist Matthew Hassan said that softening sentiment was a possibility given the increase following the RBA’s rate cut in February. The index was 9.2% above its December low.
- NAB’s monthly business survey for March showed a significant lift in business conditions trading, profit and employment posting an improvement. Wholesale and construction industries recorded the biggest lift by sector. Business confidence also showed improvement with a surprise pronounced lift in mining, although confidence in that sector is still the lowest relative to other sectors. Retail and manufacturing were the only sectors to show deterioration in the month.
- Australian manufacturing conditions contracted, but at a slower rate in March, moving up 0.9 points to 46.3 points. It was the fourth consecutive month of contraction in activity (below 50 points signals contraction).This was despite a lift in manufacturing exports.The services sector expanded for the second month in a row, albeit at a slower pace.The AIG Performance of Services Index fell by 1.5 points, but stayed above the critical 50 point mark at 50.2. Much of the growth was again concentrated in the healthcare, community, financial and insurance services sub-sectors.
- Job advertisements fell in March for the first time in nine months, according to ANZ data. Advertisements fell 1.4% in March, with internet job ads falling 1.3% month-on-month.Newspaper job ads fell 3.6% from February, and are down 21.8% year-on-year.In Western Australia, the number of jobs advertised in the mining and resources sector was 1,607 a fall of 10% in the month of February, with the number of advertised vacancies falling by around 45 jobs a week over the month.It was a reduction of 36.3% over the year, or 916, less job ads in March 2015 compared with 2,523 in March 2014.
- New car sales rose by 8% to 105,054 compared to March last year and the year-to-date total of 277,594 vehicles is 1.6% higher than it was in March 2013 which was a record year for new car sales in Australia.