With four companies entering (or, in Spotless’s case, re-entering) the sharemarket’s lists this week, the ASX has had its biggest week for floats in five months, since a bumper crop of listings late last year.
After new floats almost vanished from the sharemarket two years ago, observers are cautiously optimistic that the pick-up, which began at the start of the financial year, is maintaining momentum. By the end of the week, 96 companies, trusts and funds had listed or raised debt or capital this financial year, with at least another six expected by the end of June. By the end of April, $51.2 billion had been raised, compared with $35.7 billion in the first 10 months of the previous financial year.
This week, $950 million cleaning and catering company Spotless was sold back to public investors after two years of cost-cutting in the hands of private equity; one-third of $1.9 billion Genworth Mortgage Insurance Australia was sold to local investors by its US parent. They were joined at the smaller end of the market by copper and gold player Fifth Element Resources and New Zealand’s Intueri Education Group.
“Our sense for June is it still looks pretty solid,” said ASX listings manager Max Cunningham. Moreover, the recent activity follows a period of steady improvement, whereas the flurry late last year (featuring the listing of Nine Entertainment and Dick Smith) was the result of a “log-jam” after a quiet and uncertain period.
“The market for IPOs [initial public offerings] was closed solidly for two to three years. What we saw in the second half of 2013 was that the international IPO market reopened,” Cunningham said.
The pick-up has been driven by the return of local and international institutional interest, and this was encouraging vendors back into the market, Cunningham says. This is further helped by the lower Australian dollar. With the government’s recently confirmed plans for a $4 billion float of Medibank Private, Cunningham is hopeful it will further encourage activity.
Before the global financial crisis, the amount of money raised yearly on the sharemarket was 4-5 per cent of the total value of the local market, but by 2012-13, it had shrunk to just 2.3 per cent, MLC Investment’s Australian equities portfolio manager Peter Sumner says. He expects that to lift to about 3.1 per cent by the end of this financial year.
Companies having the confidence to offer shares to public investors is “very important – it shows you have a healthy financial market and that companies have access to money to help them keep growing”, he says. “For larger companies who also want to raise capital, they know the market is open.”
Iron ore dives
Iron ore’s decline by more than one-quarter this year has set off alarm bells well beyond the sharemarket. Its steep decline this week to below $US100 a tonne followed conniptions in March when it suffered an 8.3 per cent fall in a day.
Despite talk about the need for the Australian economy “transitioning” away from its resource reliance, the fact remains that iron ore accounts for nearly 20 per cent of Australian exports. Deloitte Access Economics economist Chris Richardson told AAP that every dollar the iron ore price sheds hits national income by $800 million and the tax take by $300 million.
Unlike the previous time it breached the $US100 floor – in September 2012 – the lower Australian dollar provides a buffer for local producers, iron ore consultant Philip Kirchlechner says. In September 2012, the Australian dollar was worth more than $US1, amplifying the pain for local companies, which report in Australian dollars.
Earlier this week, the Aussie was trading at US92.3 to US93.7 cents, cushioning the impact should the iron ore fall further in coming weeks. At current levels, Australia’s largest miners are still making very healthy profits on their iron ore deposits. After years of belt-tightening, BHP and Rio break even at below $US50 a tonne, while Fortescue Metals needs a price above $US70 a tonne to make a profit, according to Credit Suisse.
“We have been through these iron ore price cracks in the past. The price does not go only one way forever. In the past, the price falls, overshoots, rebounds and then stabilises. Late last year and early this year, port stocks were building as steel production was seasonally weak,” a Credit Suisse analyst wrote this week. “But that did not move the price. China demand fears caused the price to crack. We now seem to have arrived at the long-expected point of iron ore oversupply, which happens to coincide with a bout of extreme negativity over China demand.”
Kirchlechner, director of Iron Ore Research and consultant to both miners and steel mills, says the panic around the iron ore price is overdone, and owes more to the psychology of the market and a “momentum thing” than any fundamental shift in the iron ore market. The evolution of the iron ore pricing from a benchmark system, in which the price was set in negotiations between miners and steel producers, to a spot price set on international markets has made iron ore vulnerable to the whims of traders and financial institutions responding to any fears about the latest Chinese government policy changes.
“We have many more non-industry companies buying and selling iron ore and that has exacerbated the volatility,” Kirchlechner says.
Some analysts have forecast that an imminent peak in iron ore consumption will put significant long-term pressure on the iron ore price – as will the over-capacity of Chinese steel mills, and government determination to close the heaviest polluting mills.
But Kirchlechner believes these predictions are premature, saying vast swaths of China outside Shanghai and Beijing remain only partially developed. “The important thing to look at is white goods penetration. White goods use flat steel, and in some of the regions [the penetration rate] is only about 20-30 per cent.” It will take another 15 to 20 years for Chinese consumption to match the patterns in fully developed economies – where white goods are in every home.
“China’s current policy to increase consumption as a share of gross domestic product will be beneficial for steel-consuming industries such as refrigerators and washing machines. Premier Li Keqiang stated that the key to this policy is liberating – changing – the household registration system and providing the 200-300 million migrant workers with access to education and social services. This would then unleash their purchasing power. This [is] key to the argument that steel intensity is still growing,” Kirchlechner said.
Wages down, along with confidence
Meanwhile, the nation’s statisticians provided an unhappy selection of numbers this week. We learnt that:
• Real wages have fallen, meaning they grew at a slower rate than inflation, climbing at just 2.6 per cent for the year to March 31, compared with inflation of 2.9 per cent, the Australian Bureau of Statistics says. Public servants fared best, particularly in Western Australia, where they enjoyed yearly wages growth of 4 per cent, above the 2.3 per cent won by their private-sector counterparts.
• Consumer confidence is still far from robust. Fears about the federal budget derailed a recent warming in sentiment, with the Westpac Melbourne Institute index taking a 6.8 per cent hit, pushing levels down to those previously plumbed in August 2011.
This article was first published in the print edition of The Saturday Paper on May 24, 2014 as "Bumper floats". Subscribe here.