The imposition of tariffs by the US and China start on 6 July, one month after the 73rd anniversary of D-Day, which marked the beginning of the end of war in Europe in 1945. The imposition and retaliation could start a trade war and it could be some time before it has a D-Day, despite President Donald Trump chortling, “trade wars are good, and easy to win”. The winner will be the one losing least, there will be no winner.

While Australia is not directly involved it will be caught in the backwash. Any meaningful impact on China’s debt-laden economy which affects consumption or investment will hurt our trade balance and dampen GDP growth. As we consciously whittle away any competitive advantage based on cheap, reliable and available base load energy, we become more reliant on the export of commodities and their unpredictable prices as our manufacturing and processing enterprises become increasingly marginal. Our terms of trade and currency become more exposed.

Australia’s energy policy is in tatters, reminiscent of the mess left after a kindergarten party. A report from the Australian Industry Group entitled, From worse to bad: Eastern Australian energy prices, highlights the situation. Businesses and households will pay an additional $9.4bn to $11.7bn annually for electricity and gas once increased wholesale prices are passed through. Australia is not that fortunate it can absorb cost increases of this nature and hope to play in the world game. To put the hike in energy costs in context, Australia’s beef and wheat exports totalled $13.2bn in 2016-17.

Transparency crucial in Viva IPO

The Viva Energy retail offer is open. Cornerstone investors have put their collective hands up for about $1.2bn. The IPO is set to raise between $2.4bn and $3.06bn for the vendor Vitol Energy Partnership, depending on the extent of the sell-down between 50% and 60%. At 50%, the cornerstone investors account for half the issue and one can only assume their bids are within the $2.50-$2.65 per share range. If not, this information should have already been disclosed. I recall earlier IPOs where managers trumpeted issues were oversubscribed multiple times, only to find the prices were way below the eventual book build price and retail investors got the lot.

The Viva IPO shapes as the largest this year and I only hope transparency is paramount. Analyst Mark Taylor has a positive view of the company with a $3.00 per share fair value and suggests subscribers participate, but it’s a moderate four-star recommendation not an all-in situation.

Research of the Week

This week, on page 4 of the newsletter, Adrian Atkins looks at the challenges facing rail haulage operator Aurizon (ASX: AZJ). The company faces headwinds, resulting in a two-star (Reduce) recommendation.

- Peter

 

More from Ian, our Broome correspondent

Telstra board should cop heaps

The October 2016 $1.25bn share buyback goes down as possibly the biggest single disaster in the use of buy-backs in Australian history, only rivalled by the Pacific Dunlop case in the 90s, which was repetitive folly. The numbers speak for themselves. Telstra spent $1.25bn buying back shares at a 14% discount to the then market price of $5.14 - at $4.42. At 29 June, the share price stood at $2.62, for a loss on this wonderful board’s buy back decision of $519m, a 41% loss!! WOW!