Month: March 2019

Analysts expect depressed US gas prices to continue

THE bargain-basement US gas prices that forced a $US2.8 billion devaluation of BHP Billiton’s Fayetteville shale assets last week look set to continue for the short-to-medium term, analysts say.
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Wood Mackenzie head of oil and gas Noel Tomnay told BusinessDay last week that the US market was ”disconnected from the rest of the world” with the Henry Hub gas price trading around $US3/mmbtu while European prices were at $US8-9/mmbtu and Asia-Pacific spot prices at $US14/mmbtu.

Mr Tomnay said the Henry Hub price would not reach the $US5/mmbtu range for six to eight years, when new LNG export projects would link the US market to the rest of the world.

”We do see quite a lot of LNG coming out of the US and Canada,” he said, ”perhaps not quite 100 million tonnes per annum [as in Australia] as not all projects proposed will go ahead, and by the time you have shipped from the gulf coast to Japan it ends up costing $US11-12/mmbtu.”

For its part, BHP expects the gap between natural gas prices in the US and elsewhere will narrow in the longer term. The Henry Hub price was $US3.20/mmbtu at the end of July, up 67 per cent from its April 19 low of $US1.91/mmbtu.

Macquarie Bank head of oil and gas Vikas Dwivedi said the gas price may not have bottomed. ”The rally has been delivered by unbelievably hot weather. Then there’s been so much fuel switching, from coal plants turning off and natural gas plants replacing them. But these are both what I call ‘fast friends’. And these fast friends could disappear fairly quickly.

”If you don’t get real structural demand growth, via new homes or factories and industrial facilities that burn gas all the time, you’re not getting real demand growth.”

Mr Dwivedi said the April 19 low, ”may have been the bottom, I’m not calling for a massive meltdown in prices and I don’t think we’re going to go back down to sub-$US2 any time soon, but I’m hard-pressed to see how we continue to rally here, unless the weather helps out”.

”If we take a weather-normal view, the answer is the supply/demand balance is pretty bad. We need supply to really adjust downward,” he said.

Mr Dwivedi said there was factual and anecdotal evidence of new ”sticky” industrial demand for gas, from committed or planned investment in petrochemical plants, primary metals and automobile manufacturers.

”The most recent is methanol, which is an extremely energy-intensive chemical,” he said. ”There are a lot of proposals, a lot of interest. The one thing all these have in common is that they are all long lead-time projects. Nothing is going to show up of any real size in the next few quarters. We’re talking 2016-17, when a lot of new facilities will come on at the same time.”

A faster source of new gas demand was the potential acceleration of coal-fired power generator shutdowns. ”Right now there is roughly 30 gigawatts of coal plants who’ve already given formal notification they’re going to shut down,” Mr Dwivedi said.

He described the shutdowns as semi-permanent. ”The intent is for the shutdown to be permanent, but if they don’t knock the facility down, they can always re-start it – maintain a skeleton staff to just keep the rust off it. But the intent is to shut it down permanently.”

If gas prices rose substantially, he said: ”You could say, of all the coal plants that are shut down, maybe 20 per cent could come back on after a few months to a year – could be un-mothballed – but most of the rest will stay shut.”

That view is not universal. UBS commodities analyst Tom Price said fuel switching from coal to gas started happening when the Henry Hub gas price fell below $US3.50/mmbtu and, once it returned to those levels, ”we should expect a reversal of the trade”.

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Rubbery outlook for Ansell boss

THE Swedish chief executive of Ansell, Magnus Nicolin, seems to think one might have a more lucrative career predicting the direction of the European economy rather than running a latex glove and condom concern.
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At a media conference yesterday regarding Ansell’s €101.5 million ($118 million) acquisition of the French glovemaker Comasec, Nicolin was asked to provide his views on the European economy.

”If I knew exactly where it was heading, I wouldn’t be working here,” he said.

Transurban legacy

THE new chief executive of Transurban Group seems to think it is a tad premature considering what he wants to leave behind when he eventually departs the company.

When asked what kind of legacy he wanted to leave at Transurban, Scott Charlton assured analysts that he would keep a leash on his ego. ”I’m not trying to build an edifice to myself. I am not trying to build a Scott Charlton legacy,” said Charlton, who only started at the company three weeks ago.

The former Leighton and Lend Lease executive, however, did concede he was something of an infrastructure nerd.

”I love the sector, I love the big assets. They are fun to be part of and as an engineer, I love the complexity of the networks and sort of how everything operates together. So the sector interests me and some people might see that as weird,” said the former designer of missile guidance systems.

On the issue of legacies, Transurban also disclosed that its former chief executive Chris Lynch enjoyed a tidy 9 per cent lift in remuneration in his final full-financial year to $7.36 million. In the lead-up to Lynch’s departure, the company stressed he resigned rather than being terminated. This means he will never have the chance to leave a legacy the same size of his predecessor Kim Edwards, who departed the group with a $5 million ”strategic milestone incentive plan bonus”, a $3.2 million ”business generation plan incentive”, a $1 million short-term incentive payment and a $5 million termination payment.

Music to their ears

MELBOURNE composer Noel Fidge has claimed to have ”reinvented” the modern musical by coming up what it is certain to be a new genre: an anti-gambling musical.

A Garden of Money, which will be staged in North Melbourne from August 23 for five days, revolves around a well-off stockbroker and his gambling addict wife.

But the recent track record of finance-related stage entertainment has been rather patchy. In 2010, a British play about the Enron collapse closed after just 15 performances on Broadway.

Labelled a ”flashy but laboured economics lesson” by the New York Times, Enron lost an estimated $4 million in the US.

However, EuroCrash! The Musical continues to power on after opening on the London West End last year. ”It is a parable, and a dreadful warning about what might happen if certain steps … to save the eurozone are not taken,” says the musical’s website.

AMP plummet

AMP chief executive Craig Dunn’s Christmas hamper might be a little lighter this year, thanks to the 40 per cent dip in the company’s share price to $4.05 since late 2009.

The company lodged a change of director’s interest notice disclosing that 777,778 performance rights granted to Dunn in March 2010 had lapsed at the end of July.

CEO bonus cut

ONE wonders whether the heavy engineering concern Bradken’s 49 per cent lift in annual profits will be enough to temper any of the remaining shareholder angst in relation to the remuneration of its senior executives.

Despite posting a better than expected $100 million net profit and 3.8 per cent lift in dividends for the year yesterday, the cash bonus paid to managing director Brian Hodges was cut from the previous year’s controversial $819,000 to $393,000. At last year’s meeting more than 20 per cent of shareholders voted against the remuneration report, where Bradken’s key management personnel were paid the equivalent of 17.5 per cent of Bradken’s operating cash flows. But while Hodges’ bonuses have been trimmed, his fixed pay is still well out of the RBA’s inflation comfort zone. His base pay for the year to June 30 rose a hearty 12 per cent to $1.28 million.

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RBA breaks silence on soaring dollar

The Reserve believes the dollar is soaring because foreign investors have settled on Australia as a safe place to park their money.THE Reserve Bank has turned to ”open mouth” operations in a bid to hold back the rising Aussie dollar.
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The Reserve inserted a sentence of exchange rate commentary into the statement released after yesterday’s board meeting in a conscious attempt to let the market know it thought the dollar was higher than could be justified by the usual metrics. The sentence said the exchange rate had “remained high despite the observed decline in the terms of trade and the weaker global outlook”. The Aussie-US exchange rate has climbed 6 per cent during two months in which base metal prices have fallen 6 per cent.

The Reserve believes the dollar is soaring despite the lower prices because foreign investors have settled on Australia as a safe place

to park their money. A big part of yesterday’s Sydney board meeting was given over to discussing the high dollar and what – if anything – to do about it.

One option – not ruled out – is to intervene in the foreign exchange market by selling dollars and buying foreign currency as the central bank has done on rare occasions in the past.

This option carries a risk of being stuck with foreign assets that would turn out to be bad investments, a criticism that can be levelled at China’s policy of investing abroad in order to hold back its currency.

The Reserve is taking the view for the moment that there is little evidence of broad economic damage flowing from the high dollar, meaning it can wait. Economic growth is strong, employment is climbing and inflation is low.

If needed, the Reserve would restrain the dollar in other ways, by feeding concern about the high dollar into its decisions about whether to cut interest rates; in the same way as it feeds concern about bank funding costs into those decisions.

For the moment it is watching the dollar, letting people know it is watching the dollar, and keeping its options open.

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Leighton insists it sees an upside but reality bites

TAKING a contrary view of the world always gets a headline, and in Leighton Holdings’ case, it released a poor set of interim results but went against the prevailing view that investment activity is declining.
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The positive spin didn’t do a lot for its share price, which fell against a rising market.

In a statement to the ASX, Leighton boss Hamish Tyrwhitt said: ”Contrary to commentary suggesting a decline in investment activity in Australia, the group’s addressable markets have never been stronger.” It backed it up with record work in hand of $47 billion, reaffirmed its full-year profit guidance of $400 million to $450 million and indicated it had a pipeline of $29.9 billion worth of work that it had tendered for as at June 30.

This upbeat outlook came as Australian Industry Group (AIG) released a worse-than-expected construction index for July that showed the industry continues to contract at an accelerating rate.

AIG’s construction index dropped 2.2 points to 32.6 for July. (Anything below 50 means the industry is going backwards.)

It reflects a growing chorus of mining executives who are warning that some big projects will have to be mothballed due to a blowout in labour and equipment costs.

But for Leighton, the more projects it can win the better it is for its bottom line. As soon as a project is started a construction company can start booking a profit on a monthly basis. Some companies wait until a project is about 20 per cent complete before booking a profit, but Leighton decided a few years ago to start booking a profit immediately.

Leighton turned in a net profit of $114 million for the six months, which was within market expectations. One of the issues for investors is its gearing, which at 46 per cent is getting uncomfortably high. Given the company has $840 million of debt due within the next 12 months, it may have been more prudent to reduce its dividend payout.

But then again Leighton has a major shareholder, Hochtief, whose major shareholder, Spain’s ACS, has a mountain of debt and so a dividend payment is welcome.

Leighton has been through a lot in the past 18 months and Tyrwhitt says the company is trying to repair its reputation. It is selling non-core assets, cutting costs and ”resetting the dial on risk” after disastrous write-downs on major projects. It has a long way to go.

Adele Ferguson/Tim Colebatch will be speaking on Victoria at the Crossroads? on August 23-24. For details on the conference, go to

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Bradken posts $100m profit as foundries fire up

BRADKEN Limited, chaired by New South Wales Infrastructure head Nick Greiner, has ridden the resources boom to post a $100 million profit from its cast steel products in the mining, energy and rail freight industries.
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The result exceeded guidance given in April when the company announced an earnings downgrade due to one-off costs. The shares rose 11.2 per cent, closing at $5.74.

The company said its profit after tax was up 15 per cent after minorities, which consisted of write-downs in goodwill of some UK assets. Statutory net profit was up 49 per cent.

Managing director Brian Hodges said Bradken’s order book was at record levels, its foundries ”are pushed to full capacity” and it had added capacity at foundries in Australia, Canada, Malaysia and the US.

”Bradken margins are strong and will remain very defensible,” he said. Accounts showed its overall gross profit margin was 29.8 per cent, with mining consumables, engineered products and industrial posting margins in the low 30s. Rail’s margin was 13.6 per cent.

But the company would minimise its capital expenditure in 2012-13 ”until the outlook becomes clearer”, Mr Hodges said.

Revenue from the mining products division was up 22 per cent at $648 million, boosted by acquisitions. Rail freight sales were up 56 per cent to $330.2 million. The US-based engineered products division was up 20 per cent, to $347 million. Earnings before interest, tax, depreciation and amortisation were $220.4 million.

Mr Hodges said he expected the past year’s softness in the energy sector to ease in the fourth quarter.

”There is quite a lot of expansion in land-based oil, and expansion in gas fracking and low-cost energy, which seems to be having such a positive impact on the US economy,” he said, and Bradken would get a spinoff.

Moelis Research noted the global uncertainty with coal, which represents 9 per cent of Bradken’s sales, but thought a GFC-type slowdown was unlikely. Bradken will pay its fully franked final dividend of 21.5¢ on September 4.

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Xstrata ramps up austerity to defer $1bn spending

Coal comfort.SWISS miner Xstrata has swung into austerity mode in the face of falling commodity prices, targeting cost savings of $US970 million and deferring $US1 billion worth of spending this year.
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Xstrata overnight reported a 31 per cent drop in interim earnings before interest, tax, depreciation and amortisation to $US4 billion, compared with the previous corresponding half-year, due to a severe drop in commodity prices in the first half of 2012, blamed on renewed turmoil in the eurozone and a slowing growth rate in China.

Attributable profit fell 23 per cent to $US2.2 billion, or US75¢ per share, before exceptional items which reduced earnings by $US253 million. Impairments included: $US514 million against its investment in Lonmin, a $US162 million loss on the sale of a hydroelectric project in Chile to a joint venture with Origin Energy; $US111 million from closure of the Brunswick zinc mine, and $US21 million in merger costs. These were offset by a $US579 million deferred tax credit tied to July commencement of the Mineral Resource Rent Tax in Australia. The board declared an interim dividend of US14¢ per share, up 8 per cent on a year ago.

Xstrata is in the throes of a friendly scrip merger with major shareholder Glencore International and yesterday’s profit drop could see those investors hoping for a higher price. Shareholders are due to vote on the merger on September 7.

Chief executive Mick Davis said if the merger was voted down ”the inherent capacity of Xstrata to generate value as a stand-alone company remains very powerful indeed”.

Mr Davis decried the ”lack of conviction syndrome” which had spooked commodities markets and said the current slowdown was cyclical, not the end of the secular change in demand. Addressing concerns that shale gas would undermine thermal coal demand, Mr Davis said shale production would be largely confined to the US until next decade and coal would remain the cheapest power source for developing economies.

Xstrata shares rose 2 per cent or 18.5 pence to 901.5p in early London trade. Glencore shares also rose 2 per cent or 7.15p to 336p.

Xstrata said the $US970 million in savings would more than offset expected cost inflation of about $US580 million in 2012.

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Transurban risks backlash over CEO pay

TRANSURBAN risks infuriating shareholders again after it was revealed that its former chief executive, Chris Lynch, received a total salary package of $7.36 million for his last year in the job.
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The release of his pay details came as Australia’s largest listed toll road operator took a cautious approach to dividend guidance for this financial year due, partly, to volatile economic conditions.

Executive pay at Transurban was a bone of contention among shareholders for most of Mr Lynch’s four years in the top job. The pay report shows his total package of $7.36 million included $1.76 million in short-term cash bonuses and $3.08 million in share-based benefits.

Although Transurban appeased investors last year by changing the way it rewards management, Mr Lynch’s pay risks raising the ire of investors at Transurban’s annual meeting later this year. His total pay for 2011-12 was 9 per cent higher than the $6.75 million he received the previous year. It amounted to about 8 per cent of Transurban’s total employee expenses.

Transurban yesterday reported a 9 per cent rise in proportionate pre-tax earnings to $784 million for the year to June, which was better than analysts had expected. But the company, which operates CityLink in Melbourne and the Hills M2 and Westlink M7 in Sydney, disappointed investors with its distribution guidance of 31¢ per security for 2012-13.

Shares in Transurban closed down 9¢ at $5.94 following its cautious outlook statement.

Transurban’s new chief executive, Scott Charlton, said the board had decided to take a more cautious approach because it was a ”transition year” for the company and due to volatile economic conditions.

Although not all of the distribution forecast for this financial year will be paid out of free cash flow, Mr Charlton said it should not be taken as a sign that Transurban would return to the days when it adopted the so-called Macquarie model of using borrowings to fund dividends.

Transurban has experienced slight weakness in traffic volumes on some of its motorways, including CityLink, which comprises more than half of its toll revenue.

Mr Charlton, who took over from Mr Lynch last month, said it was difficult to ascertain whether the weakness was due to economic conditions or construction works on some of the roadways.

Transurban also warned that the completion of an upgrade to the M2 could be delayed because of wet weather. It had been due to be completed by the middle of next year.

The company posted a 50 per cent fall in net profit to $58.6 million, which was largely the result of a $138 million write-down in the value of its investment in the Pocahontas roadway in the US.

Transurban spent $US611 million on the Virginia toll road in 2006. The company said it was considering the future of the roadway, which could include selling its interest in the asset. The company will pay a final distribution of 15¢ per security on August 14, which takes the payout for last financial year to 29.5¢. It compares with a total payout of 27¢ in 2010-11.

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Company tax cuts report due

More tax trouble is looming.TENSIONS between miners and Canberra are threatening to flare up again in the coming weeks, as pressure to fund corporate tax cuts puts the industry’s tax breaks under the spotlight.
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After company tax cuts were scrapped in this year’s budget due to political opposition, an expert panel appointed by the Treasurer is due to report as soon as this week on how the government could fund company tax cuts in the future.

The Prime Minister, Julia Gillard, has signalled that any company tax reduction would have to be ”revenue neutral”, so the panel is expected to float cutting a wide range of corporate tax perks.

And despite miners’ hostility to any tax rises, it is understood the Business Tax Working Group sees cutting hundreds of millions in tax breaks for mining exploration as one way of freeing up revenue.

Accelerated depreciation rules, which benefit miners and airlines in particular, are also likely to come under scrutiny, as the working group asks big business what it is prepared to give up in exchange for lower taxes.

A source close to the working group said the depreciation rules for mining were especially wide-ranging, and cutting the instant write-offs for explorers would be included as one option in its upcoming report.

”If you’re a mining company and you buy mining rights you get an immediate deduction for that,” the source said. ”You’re getting a right to mine, it lasts a long time, should you write that off over a period?”

Instant asset write-offs for miners are worth about $300 million a year, Treasury says. Accelerated depreciation of equipment such as aircraft, trucks and tractors cost more than $1 billion a year in forgone revenue.

Any removal of mining tax breaks would likely face a bitter reception in the industry, which is being hit by falling commodity prices and weak overseas demand.

When an April report from the working group floated cuts to exploration write-offs in the lead-up to the budget, the mining industry took out anti-tax advertisements in national newspapers.

The Business Tax Working Group, led by Board of Taxation chairman Chris Jordan, has until the end of this year to report on whether company tax cuts are justified and, if so, how to pay for them.

But after Ms Gillard said in June that she had ”no doubt” company taxes should be lower than their current rate of 30 per cent, the working group is set to argue the case this month for corporate tax cuts.

Echoing the Henry review of taxation, the group’s report is expected to say Australia’s relatively high company tax rate of 30 per cent is due to be reduced because it could affect the nation’s ability to attract capital.

The challenge, however, is how to pay for lower company taxes.

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Farewell Robert Hughes – critic, raconteur, fisherman, shooter,historian, memoirist

Robert Hughes at the 1997 Sydney launch of his book The Fatal Shore. Robert Hughes with former PM Gough Whitlam at the launch of The Fatal Shore in 1987.
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IN THE American century the art critic Robert Hughes was the first Australian to turn from England and take Manhattan.

Thousands of Australians, including his mates in the Sydney Push, Germaine Greer and Clive James, were carving careers in swinging London’s fag-end years. But Hughes was the only one to complete an Atlantic crossing.

He had erupted as a precocious art critic from the land of the convict taint on the pre-Murdoch Sunday Times when the man from Time happened to flip through a copy of Hughes’ 1969 flop Heaven and Hell in Western Art.

The magazine was America’s window to the world and the men and women who worked on it belonged to a sort of east coast Brahman class. But when the senior editor phoned to offer the Time art critic job, Hughes recalled he was so stoned he thought it was the CIA calling.

”In a measured and dignified way, I told this spook exactly what I thought of the American imperialism whose tool he was, of American policy in Vietnam, of American perfidy. It was quite a little performance. I then, secure in the knowledge of a good day’s work compressed into a couple of minutes, hung up in his ear,” Hughes wrote in a 2006 memoir Things I Didn’t Know.

Nevertheless, he moved to Manhattan in 1970 and wrote for Time for the rest of the century.

Along the way he evolved into a leading intellectual, who not only defended art against postmodernism but also educated and informed millions around the world in immensely popular TV series and books such as The Shock of the New in 1991.

His 1987 hymn to Australia, The Fatal Shore, is his best known work. The book heroically reminded Australians the convict taint that had caused collective amnesia in previous generations could be a badge of honour, and few were surprised when the expat emerged as a leading voice of the republican movement.

Hughes died in New York yesterday from a long illness. He was 74. He had been in bad health since a 1999 car accident in Western Australia left him in a coma. A protracted court case in which he eventually pleaded guilty to dangerous driving causing grievous bodily harm and was fined $2500 further eroded his health.

Prime Minister Julia Gillard said yesterday Australia had lost not only a frank critic and writer, but an esteemed historian who made significant contributions to tracing and telling Australia’s colonial history.

”Few people … can have been so completely cosmopolitan, and completely Australian as Robert Hughes. His was, in every sense, a great Australian voice.”

Another Australian occupant of the world stage, satirist Barry Humphries, said Hughes was an old friend and a great and fearless critic. ”He gave a wonderful and witty speech at my last birthday party in New York and I’m deeply saddened that alcoholism, or whatever name it sometimes goes by, should have claimed yet another distinguished victim,” he said.

His niece Lucy Turnbull said Hughes combined irreverence and larrikin charm and humour with an incredible gift for language: ”He was a real man’s man … he was a very keen fisherman and shooter as well as being an erudite and very learned communicator and so knowledgeable in the arts.”

Hughes came from an establishment, but Catholic, family. His grandfather was Sydney’s first lord mayor, his father was a highly decorated First World War pilot who trained Australian flyers in the Second World War and died when Hughes was 12. His brother Tom, was John Gorton’s attorney-general but, dumped by Billy McMahon, retired to a glittering career at the Sydney bar. He also had a brother Geoffrey and sister Constance.

He was educated at Sydney’s Riverview and, if the Jesuits did not keep their man, they inculcated a grasp of religious iconography that impressed the man from Time. Hughes failed to finish an architecture degree at the University of Sydney, drew cartoons and wrote art criticism for the Packer family’s current affairs magazine The Observer and then set sail for London in 1964.

In 1967 he married Danne Emerson. The marriage produced a son. Academic Catherine Lumby recalls the pain Hughes went through when they divorced. ”Life was pretty freewheeling for some in those days but Bob wasn’t one of them,” Lumby said. ”He … was clearly hurt by what was occurring.”

His son, Danton, committed suicide in in 2002.

Hughes married twice more. The second marriage, to American artist Doris Downes, was in 2001. She had flown to be with him after the 1999 Broome crash.

Barry Humphries knew Hughes in expat London and as young bohemians around Sydney in the mid 1950s. The satirist once joked he modelled Les Patterson on him, partly because in 50 years in New York he never lost his Australian accent.

Nor did Hughes lose his sense of place: He remained an Australian citizen.

Correction: The original version of this story incorrectly said Hughes’s sister Connie was a nun.

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