The complexities of ‘interesting years’
NICK BRUINING
CERTIFIED FINANCIAL PLANNER
NC BRUINING & ASSOCIATES
You know the party is starting to wind down when a few of your
sensible friends start to quietly make their exit. I only know this
because I have on occasion been the last to leave, close to the
point where I might be asked to help clean up the mess. Of some
interest is that, like my sensible friends, many of the major fund
managers have been slipping away from the resources sector,
steadily reducing their exposure.
To say it has been an ‘interesting year’ in markets would surely
go down as one of the great understatements of the century. While
the jury is still out on where commodity prices might head next,
if nothing else – it has been a nasty wake up call for those who
think the party will go on and on. The reality is that in the big wide
world we live in; we are ultimately price-takers and that whether
we like it or not, cost of production becomes a factor when we are
competing against the rest of the world.
Good luck to the truckies who are making $140,000 per year on
fly-in, fly-out. Good luck to those collecting $2,000 per week rent
on their 3 bedroom, one bathroom house in the WA north-west.
The fact is these are distortions when we compare ourselves to the
rest of the world, and with our major trading partner snapping up
alternate supply lines, the day of reckoning must surely be coming.
Companies heavily indebted are the first to feel the pinch, as
‘
Salt Suite’ (2/4) by artist Larry Mitchell
The Pilbara Project, FORM
trigger points are reached on ore price and share price. The very
public ‘restructurings’ and cost reductions are about the latter
and the former is very much dependent on offshore activity, and
whether the alternate supply chains are online. Lenders are quite
clear about what makes them nervous and if prices stay depressed
for an extended period, they act.
As we have been enjoying our days in the sun, competitors in
Africa and Asia have been feverishly getting projects up; moving
quickly from exploration to production, and our trading partners
(
read customers) have been itching to get on board. Sure, no one
would work for $2 per day, and that is not what’s being suggested.
But if their cost of production is such that they can make money
from $50 per tonne – well?
The crunch for us, however, may well be in the Australian
domestic economy as the effects of the restructurings play out
across a range of sectors.
Retail has been feeling the pinch for a while. Consumer
discretionary for high-end goods has been smashed to the point that
stores in WA have simply closed-up shop. Walk through many of
our major department stores these days, and you are almost tackled
if you try to get out the door without buying something, anything.
The first major casualty may well be residential housing. The
multi-speed economy has already seen residential house prices
decline across the board, although not surprisingly, resource
dependent states like WA and Queensland have been somewhat
cushioned in relative terms.
While most of us can battle reduced income through a loss
of bonuses or overtime and penalties, unemployment is a
fundamental game changer. As contracts stop being renewed
and the lay-offs come, suddenly owning two or three investment
properties might not have been such a good idea. It will not be
pretty if a bundle of residential investment properties suddenly
hit the market. Not surprisingly, bank stock analysts have
already flagged ‘future impairments’ as a major factor for our
main and middle-tier regional banks.
This also flows through to the construction sector. Throw in a
depressed housing sector and abandoned construction projects,
and you suddenly have a few thousand sparkies, concrete workers,
welders, fabricators, painters and cooks all looking for work.
So the canny might just put ‘two bob each way’. On a personal
front, weigh up your worst-case scenario and see what you can do to
protect your rear. Quit the questionable asset now rather than later,
when people are potentially in ‘fire sale’ mode, and be prepared to
accept a price that the market offers. There is something to be said
about being able to sleep at night.
Sure it might not happen, but if it’s a question of marginality –
make sure the head rules and not the heart.
So while we all wait with baited breath for those damned
prices to kick back up, just remember the party analogy. There is
nothing worse than clearing up the mess when you have a monster
hangover. Just be ready to slip away quietly with the sensible
people. There is always another party sometime, somewhere.
MINESITE 2012
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