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Weekly market update - 11th of April 2019

Written and accurate as at: Apr 11, 2019 Current Stats & Facts

The local market shed -0.6% last week, dragged down by financials (-0.8%) and listed property (-2.5%).

The latter was part of a broader trend of underperformance among the bond-sensitive stocks, as Australian 10-year yields rose 13bps to 1.91%. Scentre Group (SCG) fell -5.3% and Goodman Group (GMG) -3.6%, while infrastructure stocks Transurban (TCL, -1.3%) and Sydney Airport (SYD, -2.6%) also underperformed. 

The Federal budget did not move markets. The greater issue is the high degree of policy uncertainty that will persist between now and the election. We are seeing repeated instances of management sitting on their hands, unwilling to spend or make strategic decisions until policy and regulatory risk has been resolved.

Fortescue Metals (FMG, +9.4%) was one company to buck this trend, announcing the decision to forge ahead with its Iron Bridge JV project in Western Australia. This is a magnetite ore development – as opposed to the more usual hematite ore mines. Magnetite provides a better quality of ore, but ore bodies are less concentrated than hematite. This means the former is more costly to run and have had a chequered history of success in Western Australia over the years.  The project should take 3-4 years until production, cost FMG ~$2b and be capable of producing 22m tonnes per annum. Once producing, FMG will be able to blend with the lower-quality ore from its other mines, allowing it to lift the average quality. This leaves it less vulnerable to the risk of higher discounts for low-grade ore, such as we have seen in recent years.

While the market welcomed FMG’s announcement, the rest of the iron ore sector also outperformed as Vale provided more detail about the production declines that will accompany its tailings dam reviews. BHP (BHP) gained +1.9% and Rio Tinto (RIO) +2.0%.

Coal miners went the other way, with Whitehaven Coal (WHC) down -5.2% as the price of Newcastle coal continued to slump. There are a couple of factors at play here. First is the seeming ban of Australian thermal coal at some Chinese ports, such as Dalian. While not officially embargoed, customs clearance for Australian coal is being delayed, forcing ships to sit offshore at considerable cost.

The consensus view is this is a political signal from Chinese authorities, in response to the Australian government’s ban on Huawei’s participation in 5G. Thermal coal is vulnerable in this regard, in that the Chinese economy is less reliant on Australian imports than it is in iron ore or coking coal.

At the same time, the pressure is being compounded by low natural gas prices, which are prompting a degree of substitution away from coal by some buyers in Europe and also in Japan.

We can see pressure on the coal price persist in the short-term, although a move through the current ‘shoulder season’ and into a period of stronger seasonal demand may provide some relief. It is also important to monitor the price of domestic Chinese coal – which has been rising in response to the disruption in Australian supply and could start placing pressure on the domestic power producers.

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