Coal jumps as BHP breaks dividend record: What we learned this week
Western exodus from Russian oil and gas could be costly, Commonwealth Bank forecasts a fall in house prices and super fund fees to drop.
Coal is back
Predictions of the ‘death of coal’ look to have been greatly exaggerated. Newcastle coal futures jumped 40% on Wednesday as buyers scrambled for alternatives to Russian coal. Russia is the third-largest producer globally. Despite easing on Thursday, prices have more than doubled this year. Local producer Whitehaven Coal is reaping the benefits, with the share price up 41% year to date.
BP mulls expensive exit from Russia
Global energy giants BP, Shell and Exxon Mobil announced plans this week to cut ties with Russia’s oil and gas sector. The devil is in the details. Buyers for their stakes in Russian energy projects are likely to be scarce and the willing may struggle to finalise deals because of sanctions, reports Bloomberg. Selling at a steep discounts or expensive write offs could be the result. BP says writing down its 20% stake in Russian energy giant Rosneft could cost up to US$25 billion, more than the market cap of Woodside Petroleum. BP chair Helge Lund said the oil major could no longer be involved with state-owned Rosneft following Russia’s attack on Ukraine.
Fourth place for Aussie dividends
BHP reported the world’s largest-ever mining dividend for the year 2021 as Australian corporates splashed a record $87.1 billion in payouts, according to a new report by fund manager Janus Henderson. Strong performance from banks and miners helped Australia pay the fourth highest dividends globally in 2021, after the US, UK and Japan. Miners around the world are enjoying bumper profits, paying out ten times more in 2021 than they did during the commodity price slump of 2015-16.
Markets bet Fed will slow pace of rate hikes (a little)
The US Federal Reserve started the year readying markets for higher interest rates. Uncertainty over how Russia’s war in Ukraine could spill over to the West now has markets betting on a slower pace. Last week the probability US interest rates would be above 2% by March 2023 was 45%, according to data from GME Group. Today, it’s down to 33.4%. Bets are steadying on rates being between 1.5% to 2%by then.
Fire then floods
Devastating flooding continues in northern NSW and Queensland with thousands evacuated and more than ten killed. Coming two years after bushfires swept the East Coast, it has drawn attention to the impact of global warming on weather patterns. Federal Emergency Management Minister Bridget McKenzie acknowledged climate change would cause “more intense and irregular events” on ABC TV yesterday. It comes weeks after tech billionaire Mike Cannon-Brookes and Canadian asset manager Brookfield made a bid for AGL Energy with the promise to shut its coal plants by 2030, decades ahead of schedule.
House prices to slip
Commonwealth Bank, Australia’s largest mortgage lender, thinks house prices are due for a meaningful dip in 2023 as interest rates rise. Sydney and Melbourne will be the worst hit, easing 3% this year before a further 9% fall in 2023. Using the bank’s forecasts, RateCity calculated that the median Sydney dwelling would fall below $1 million by 2023.
Your super fees might be about to fall
Sunsuper and Qsuper merged to create the $227 billion Australian Retirement Trust on Monday as consolidation in the sector heats up. The new fund will be only a hair smaller than Australia’s largest, the $250 billion behemoth AustralianSuper. Members will benefit from a small reduction in administration fees from 1 July. Link Administration (ASX:LNK) is likely to benefit from this consolidation among its industry fund clients, says Morningstar equity strategy Gareth James. Dye & Durham agree. The legal and property technology company is set to acquire Link pending court and shareholder approval in the next three months.
Also this week, Australia Retirement Trust said it would sell its $130 million worth of Russian assets, according to the Australian Financial Review. It joins other like AustralianSuper, Aware Super and Colonial First State in committing to dump Russian assets following the invasion of Ukraine.
Stagflation warnings
Morningstar editorial’s inboxes exploded this week with analysts mulling a return to the stagflation of the 70s and 80s. Stagflation refers to a period of stagnant growth and rising inflation. Today’s worries centre on how rising raw material costs and ongoing supply disruptions could keep prices high while squeezing growth. The jump in energy prices following Russia’s invasion of Ukraine is drawing parallels to the oil shocks following the 1973 Yom Kippur War and the 1979 Iran Revolution. How can investors respond? Commodities may do well in this environment, says Amundi Asset Management.
Commodities lift the ASX: Market wrap
Energy and resources stocks helped the ASX higher this week as Russia’s invasion of Ukraine triggered a massive rally in commodities from oil to natural gas to wheat.
The benchmark slipped 0.6% on Friday for a 1.6% weekly gain. Energy and material rose 8.9% and 8.1%, respectively.
Raw material prices are soaring as traders grapple with how Russia’s invasion of Ukraine could disrupt tight commodity markets struggling from years of underinvestment. Risk-averse buyers are spurning Russian oil and gas cargoes as intensifying fighting raises the risk crucial export pipelines and ports are closed.
“The moves in energy and commodities have been remarkable,” says Aaron Binsted, a portfolio manager at Lazard. “Coal above US$400, LNG trades at US$50, Brent and WTI are over US$100… the combined burden coal, gas and oil is the highest since the 1980s.”
“People are wondering if supplies will be disrupted. Senior politicians in the US are still talking about sanctions for energy. That would be a huge disruption.”
Natural gas giants Woodside and Santos are up 9.7% and 4.7%, respectively. Resource heavyweights BHP, Rio Tinto and FMG rose between 6.7%% and 9.5%. Whitehaven Coal leapt 22%.
Technology stocks retraced a rally early in the week as US Federal Reserve Chairman maintained the bank would raise rates in March, dashing hopes that war would lead to a deferment, says Binsted. The sector fell 3.6% on Friday to end the week up 0.6%.
In company news, engineering and building group Hochtief has taken its stake in CIMIC from 78 per cent to more than 81 per cent through a $1.5 billion bid.
CSL was up less than half a per cent to $258.30 after gaining 74 per cent of shares in takeover target Vifor Pharma. The biotech giant said it would waive its original 80 per cent acceptance rate condition and declare its $16 billion takeover offer a success. Swiss government approval is still required.
Reserve Bank governor Philip Lowe will speak at two conferences next week and could be pressed to offer more comments on how the war in Ukraine might affect inflation.