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Markets Live: Bears bite Fortescue

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As many readers will no doubt have heard, Fairfax journalists have decided to go on strike for the next 24 hours (until 3pm tomorrow) to protest against 70 job cuts, including many photographers.

This blog will be published tomorrow, albeit in a slimmed down version. We hope you understand.


Regional bourses also suffered losses, with the biggest drop in Japan where Nikkei tumbled 2.9 per cent to a three-week low.

It was the biggest daily drop since mid-March, as a stronger yen dragged down exporters and concerns about Ukraine curbed investors' risk appetites.

market close

The local sharemarket has closed sharply lower, led down by the miners.

The benchmark S&P/ASX200 index dropped 45.6 points, or 0.8 per cent, to 5435.8, while the broader All Ords lost 43.6 points, or 0.8 per cent, to 5419.1.

Among the sectors, materials plunged 1.5 per cent, with iron ore miners hit hardest. Financials fell 0.7 per cent and IT stocks lost 2.3 per cent.


Iron ore mining companies in China face a rising challenge from increased overseas supplies of the steel-making raw material, and some higher-cost capacity will probably be forced to close, according to BHP Billiton.

The gain in global production is being led by Australia and Brazil and their new, low-cost output will displace marginal suppliers in China, Michiel Hovers, vice president of iron ore marketing at BHP, told the Singapore iron ore forum today.

Vale, the world’s biggest producer, plans to raise output almost 50 per cent by 2018, Claudio Alves, global director marketing and sales, told the gathering.

‘‘Growth in seaborne supply growth will come largely from Australia and Brazil,’’ said BHP’s Hovers. ‘‘This new supply will be low-cost seaborne and displace marginal supply from high-cost domestic Chinese producers and other lower-quality iron ore imports into China.’’


A week ago it was Spain, this week it’s Italy. Bond investors are so enamoured with the peripheral euro regions that the Italian 10-year bond yield has now fallen below 3 per cent for the first time, the AFR’s Phil Baker notes.

Last week the yield on Spain’s 10-year bond also made its debut below 3 per cent. The yield on Portugal’s 10-year bond has also fallen, to around 3.56 per cent, the lowest since early 2006.

It’s a far cry from a few years ago when bond yields in the region were above 7 per cent and investors fretted the eurozone could be split up. These days the region is behaving more like a safe haven for investors.

The latest round of buying in these euro region bonds was sparked by the Organisation for Economic Co-operation and Development upgrading its growth target for the European Union to 1.2 per cent for 2014, up from 1 per cent.

But is Italy in really good economic shape?

Bridgewater sent out a daily letter a few days ago to remind investors that the political climate is still volatile while economic conditions are on a par to what they were in World War II. The economy is still shrinking, the banks are in bad shape, there’s not much lending from the private sector and the European Central Bank is still struggling to solve the problems.

It’s a major reason why analysts are talking up the prospect that it will eventually start its own program of quantitative easing, which in turn has been a key driver of the drop in Italian bond yields. The Bank of Italy has also warned the recovery is ‘’fragile’’ but investors keep piling in.

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What crisis? Italy's bond yields are at record lows.
What crisis? Italy's bond yields are at record lows. 
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Most companies are set to enter the confessional booth in the next two months as they prepare for the end of the financial year, Citi analysts say.

''While over half of the improvement in business conditions recorded in surveys since mid last year has been sustained, some weakening in recent months still suggests possible downgrades,'' Citi analysts Tony Brennan and Vivian Jiang say.

Despite the downbeat assessment, Citi has identified a handful of companies it expects will surprise positively.

Citi analyst Dale Koenders is upbeat on Origin's execution of the Australia Pacific liquefied natural gas project. Origin holds a 37.5 per stake in the venture, which Koenders says is on budget with first sales production in the second quarter of calendar 2015.

He says while Citi expects a small increase in electricity margins going forward, Origin's strong supply portfolio coupled with oil-linked sales contracts from 2015 should help add more than $300 million in earnings before interest and taxes from the 2013 to 2017 financial years. Citi has a buy rating for Origin with a $16.79 price target.

News Corp is also expected to surprise, despite subdued earnings growth with print assets still in transition. But Citi analyst Justin Diddams says growth at online real estate site, REA Group, which is majority owned by News Corp, would likely offset part of the revenue decline for print.

''We also expect net cash outflows during the quarter, related to timing of cash costs,''  Diddams says, adding Citi retained its buy rating for News Corp based on improving operational momentum into the 2015 financial year. He says this will be underpinned by equity stakes in market leading digital and payTV assets.


Talking about budget pain: it is now understood the threshold for the controversial debt levy could be restricted to those on incomes above $150,000 paying an extra 1 per cent, the AFR is reporting.

This would ensure that the tax hits the highest earners, and spares the middle class – who are likely to face cuts to their welfare benefits in the May 13 budget – from being hit twice.

Economists and tax experts agree that the budget deficit needs to be fixed, but have questioned the merits of a temporary deficit levy as a way to do this.

National Centre for Social and Economic Modelling principal research fellow Ben Phillips says assuming the tax is levied at 1 per cent for people beyond the $150,000 threshold, it would hit 650,000 people, or about 7 per cent of taxpayers. If threshold for the deficit levy was set at $180,000, it would impact just over 4 per cent of taxpayers.

Phillips said while the Abbott government needed to introduce measures aimed at higher-income earners to avoid only low and middle-income earners being targeted, a temporary debt tax was not the solution.

“I don’t think it’s a gold standard in terms of taxation policy,” he said. “Australia needs longer-term tax reform. This is a stopgap measure. The measure clearly will not please the purists, and in the long term, the government can do better reform.”


The federal budget will be less painful than anything delivered by the Hawke and Howard governments, according to research by ANZ that concludes the Abbott government should start the repair job now.

In a report that finds there is “very little” risk the budget will be so brutal that it undermines a nascent economic recovery, the bank’s economists Warren Hogan, Cherelle Murphy and Felicity Emmett say delays to the fiscal repair job will leave the country vulnerable to future economic shocks.

Despite widespread rhetoric of a so-called “horror” budget on May 13, the reality is likely to be far softer as the government delays most of its major structural changes for several years, they say:

  • Our analysis suggests that the expected fiscal tightening will run very little risk of undermining the recovery in the non-mining economy.
  • We are precisely at the right time of the economic cycle for a modest fiscal consolidation.
  • Indeed, improving government finances may even support business and consumer confidence and encourage private investment if Treasurer Hockey and the Prime Minister can effectively sell the budget strategy to the broader community.

Expect more defaults in China’s steel industry as debt levels bite, says Baosteel assistant president Zhang Dianbo.

‘‘The capacity excess has enabled the price of steel to go down, secondly the concentration of the steel industry is very low and this has enabled the competition to be higher,’’ he told the Singapore iron ore forum. ‘‘On the other hand, on the new policy from the government about environment production, I believe there will be an elimination process, through this, I think the Chinese steel industry will go into a more balanced period and will be more healthy for the Chinese steel industry.

‘‘With the influence of the external environment, the cashflows, I think the Chinese steel industry is faced with great pressure and many trading companies and steel mills are going for overseas or offshore financing to support themselves.

‘‘With the overseas debt level increases, I think there will be more defaults happening, but this won’t be mainstream.’’


Glencore Xstrata has started cutting back coking coal production in Australia and will focus more on its thermal coal mines, in a sign that the rush to increase exports is starting to sort the wheat from the chaff in the Australian coking coal industry.

A collapse in coking coal prices has been exacerbated in recent times by a flood of new production in Queensland, where the likes of BHP Billiton, Anglo American and even Wesfarmers have been increasing exports of the steel ingredient.

The tough environment has prompted Glencore to cut back its coking coal operations in favour of focusing on its thermal coal operations in New South Wales.

The Swiss miner saw coking coal production in Australia fall 17 per cent during the March quarter, and said that was linked to; ‘‘a decision to move away from certain high cost mines and areas ... and focus on higher margin thermal coal production.’’

The production boom in Queensland seems to have had an impact on North American producers too, seven of whom have started cutting back production since the benchmark price for low-volatile hard coking coal hit $US105 per tonne in mid March.

UBS analyst Tom Price has estimated that the cutbacks in North America represent about 14 per cent of supply from that continent, or about 4 per cent of global supply.

  • The Canadian and US producers have cut about 13 or 14 million tonnes out of the trade since March and that has been one of the key supports for the price over the last month or so.
  • I’m actually a little bit more optimistic about metallurgical (coking) coal than I am on thermal coal in 2014.
  • There is more production cuts coming from the US, and if that continues to happen in the next few months I think metallurgical coal prices could recover.
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China's steel industry is facing pressure through increased environmental regulation, potentially adding to pressure on iron ore prices, Chinese steel industry representatives attending the Singapore iron ore forum say, according to our reporter Max Mason:

Liu Yi Nan, Vice Chairman, China Chamber of Commerce of Metals, Minerals & Chemicals Importers & Exporters (CCCMC)

  • The Chinese steel industry are faced with pressure from environment protection. This change will have great influence for this year’s iron ore demand and iron ore prices.
  • We believe that the iron ore suppliers are in a position of high monopoly.

Wang Xiaoqi, Vice President, China Iron and Steel Association (CISA)

  • Iron ore’s price has gone down, however compared with the steel price, the decline is not that big. You can see the steel price and iron ore price decline rate is very different.
  • The deeper source is because our development is for quantity and we have overcapacity. That’s why we have to have a price war and we cannot sell our inventory.
  • We believe that China’s steel capacity has reached the peak flattening stage. We have come to the end of the stage of capacity increase. We have to do structural adjustment and updates, we have to focus on users need, energy conservation and environmental concerns.
wall st

A mobile phone application that tracks the stock picks of Warren Buffett, Carl Icahn and other elite investors has paved the way for small investors to replicate their holdings through exchange-traded product. Now it’s coming to Australia.

Finding out exactly which stocks billionaire investors have been buying and selling has always been possible. But it’s never been as easy as with the iBillionaire mobile phone application, which collates and presents 13F regulatory filings, allowing users to track the moves of the elite investors move as they happen.

The app is already a success with 100,000 downloads reached last week, including 5000 from Australia.

The real opportunity for the chief executive of iBillionaire, Raul Moreno, is the index created with the New York Stock Exchange to track the movements of these great investors that will soon allow investors to replicate their holdings through an exchange-traded fund. The index is comprised of the 30 of the billionaire investors’ most widely held large cap stocks.

“These billionaires are active. They have the contacts, expert and knowledge to be influential at a board level. So by having an index, you will benefit from all these billionaires working for you!”

The iBillionaire index has returned 14 per cent per year over eight years, double that of the S&P 500.

Moreno says he has already been contacted by Australian product creators to offer the ETF in Australia and might even tailor the index to include some local billionaire investors such as Platinum’s Kerr Neilson, who files his transactions in the United States.

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iBillionaire says its index has returned 14 per cent per year over the past eight years.
iBillionaire says its index has returned 14 per cent per year over the past eight years. 

London nickel is hovering close to 15-month highs, supported by rising prices for nickel ore as Chinese nickel pig iron producers run down their stockpiles after Indonesia banned exports in January.

Prices for nickel ore in China have surged this year after Indonesia banned shipments of the raw material which is used to make nickel pig iron (NPI) - a substitute for refined nickel in the country's giant stainless steel industry.

Some stainless steel makers are now turning back to refined nickel and scrap metal as feed for their production, said Peter Peng of consultancy CRU in Beijing.

"NPI production started to drop in April as some of the largest producers also cut back production because their laterite ore stocks decreased greatly," he said. "Some plants had stocked (a total of) about 2 or 3 million tonnes early this year, but less than 1 million tonnes (is) left in their warehouses," he said.

Prices for 1.8 per cent laterite ore have soared to $US100 per tonne on a cost insurance and freight (CIF) basis from $65 a tonne in mid March, CRU estimates.

Three-month nickel on the London Metal Exchange climbed 0.4 per cent to $US18,630 a tonne, after earlier hitting $US18,700 a tonne - within a whisker of its April 28 peak of $US18,715, the loftiest since February 2013.

Shares around the region are being sold off today amid growing concern China's economy is slowing.

  • Japan (Nikkei): -2.3%
  • Hong Kong: -1.05%
  • Shanghai: -0.3%
  • Taiwan: -0.2%
  • Korea: -0.9%
  • ASX200: -1%
  • Singapore: -0.4%
  • New Zealand: +0.15%

‘‘Investors need to remain cautious,’’ says Matthew Sherwood, head of investment markets research at Perpetual. ‘‘They have decided to take some profits in the wake of recent upbeat sentiment.’’

Online sales

The meteoric rise of Chinese internet retailer Alibaba from an idea dreamed up in the apartment of English teacher Jack Ma, to soon to be publicly traded company in the world’s home of capitalism, epitomises the powerful forces transforming the global economy, the AFR's John Kehoe writes from Washington.

Chinese commerce and digital disruption to traditional business models have been two of the most potent developments in the world economic system in recent years.

Alibaba is already probably the world’s largest online and mobile commerce company, with its $US248 billion in annual retail turnover dwarfing Amazon’s $US100 billion and eBay’s $US75 billion.

Its initial public offering prospectus lodged with the US Securities and Exchange Commission on Tuesday, flagging an initial $US1 billion share sale, suggests this revolution may only be beginning.

There is a massive untapped market for Alibaba, which controls 80 per cent of the Chinese e-commerce market with its three main sites Taobao, Tmall and

A read of the demographics it has to work with explains why analysts believe the firm will be valued at about $US200 billion after it floats.

Internet penetration across China’s 1.3 billion people of 45 per cent is low by developed economy standards. But it is rapidly expanding. Internet users in China grew from 298 million or 22.6 per cent of the population, to 618 million last year. The prospectus cites iResearch projecting that China’s Internet population will grow to 790 million by the end of 2016.

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Jack Ma - from English teacher to e-commerce magnate.
Jack Ma - from English teacher to e-commerce magnate. 
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Junior copper explorer Stavely Minerals is trading slightly higher after making its ASX debut at 12:30pm.

Shares in the $16.9 million company are up 1 cent, or 5 per cent, from the offer price of 20 cents at 21 cents.

The initial public offer raised $6.1 million for the company, falling short of the $8 million it had been seeking. A minimum subscription of $5 million had been set for the float to proceed.

Money raised will be used to fund exploratory drilling at two assets the West Australian company owns near Ballarat in Victoria. Joint Ore Reserves Committee documentation shows the Stavely tenement contains 28 million tonnes at 0.4 per cent copper, while the Mt Ararat tenement is a deposit with 1.2 million tonnes of mineral ore at 2 per cent copper.

It is expected gold will be a by-product of both future copper mines. The directors have already spent about $4.7 million on acquisition and exploration.


Australia's biggest telecommunications provider Telstra gets attacked by hackers chasing its customer data every single day, according to its head of information security Mike Burgess.

But he also said the company had not detected a successful hack once in the 18 months since he joined the job.

"The ones we've detected we've been able to stop," he said. "In my time I've not seen a successful hack stealing data, although there have been ... instances where data has been lost or accessible but that was a mistake by one of our partners.

"But I have to give a Donald Rumsfeld answer because if [the hackers] are really, really good and they're using techniques that the world doesn't know about then there's a possibility that we don't know [we've been hacked]."

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shares down

The sharp fall in Fortescue's share price since March can be put down to investor fears over the iron ore price decline, Credit Suisse mining analyst Matt Hope says:

  • It looks like the market is pricing about $80/t into Fortescue, not the attractive margins that remain at the current iron ore price.
  • Shorter term investors have fled iron ore by unloading all the stocks, but FMG is harder hit than Rio Tinto given its pure exposure and higher costs.

Fortescue isn't the only iron ore miner trading in bear market territory. The following stocks have all been hit hard by fears of a further plunge in the iron ore price:

  • Atlas Iron: -4% to 83.5 cents, down 27% since 2014 high
  • BC Iron: -3.2% at $4.045 cents, down 25.6% from 2014 high
  • Mt Gibson: -1% to 72.25 cents, down 40% from 2014 high
  • Gindalbie Metals: -6.4% to 4.4 cents, down 60%

The big global miners have also fallen from their 2014 highs, but the drop hasn't been nearly as steep, as these companies are more diversified - but Rio, which depends more on iron ore than BHP has been sold off harder:

  • BHP: -1.2% at $37.215, down 5.5% from 2014 high
  • Rio: -1.4% to $60.65, down 14%


More falls ahead? The iron ore price (white line) and the shares of Fortescue (orange), Rio (green) and Atlas Iron (purple).
More falls ahead? The iron ore price (white line) and the shares of Fortescue (orange), Rio (green) and Atlas Iron (purple). 

The rich are getting richer all around the world - a nice chart feeding into the growing inequality debate, courtesy of Pew Research demographer Conrad Hackett:




ASX Ltd chief executive Elmer Funke Kupper says concerns about high-frequency trading in the United States should not be compared to the Australian market, where conditions are different.

Mr Funke Kupper said he had read and agreed with the concerns raised in Michael Lewis' best-selling book Flash Boys but said they did not apply to the Australian market.

"The regulatory settings and the market structure in Australia are materially different than in the United States," he told the Macquarie Australia Conference.

The debate about high-frequency trading stepped up a notch earlier this year amid the release of Lewis's book and claims by Industry Super Australia that high-frequency traders cost large investors $2 billion a year.

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