WA Index

Analysis

WA Index

Issue 174 | April 2018

Welcome to the 174th edition of the Deloitte WA Index, a monthly review of Western Australian stocks and indices.

Download the list of WA’s top 100 listed companies, as of 31 March, explore the sections below and if you don’t currently receive our WA Index, please register to be added to our distribution list.

Highlights

If you have any questions in relation to the Deloitte WA Index please contact Sam Wardle.

As of 31 March 2018

Commodity review

The commodity market experienced mainly price decreases in March, with tariffs announced in the US, and China’s push for pollution reduction. Declines in the price of aluminium and steel were triggered by the announcement of new US tariffs from President Trump, natural gas prices were influenced by increases in gas supply from the US, and nickel prices remain affected by mine closures in the Philippines.

The price of aluminium fell by 7.7% during March to US$1,986.75/metric tonne as a result of a 10% tariff on aluminium imports in the US, introduced earlier in the month. It was later confirmed by both Prime Minister Turnbull and President Trump that Australia would in fact be exempt from such tariffs on steel or aluminium, due to Prime Minister Turnbull being “committed to having a very fair and reciprocal military and trade relationship” per a tweet from the US president. Further impacting the price of aluminium, cuts to Chinese smelting capacity have ended resulting in a large increase in aluminium stockpiles on the Shanghai Futures Exchange and London Metal Exchange. Inventories at these exchanges are at record levels at nearly 1 million tonnes and 1.29 million tonnes respectively.

Similarly to aluminium, iron ore fell 20% to US$64 per tonne at 31 March 2018 following the announcement of a 25% tariff on steel imports to the United States. China threatened to respond as necessary in the event of a trade war with the US, leading to uncertainty in the iron ore market. Additionally, the price of iron ore continues to be impacted by the Chinese steel industries’ attempt to reduce pollution by closing dirtier steel factories.

Nickel prices decreased in March by 3.6% to US$13,253/metric tonne. Poor demand from Chinese stainless steel mills is the driver of this decline, with concern that lessening profit margins may force mills to halt production. There is also uncertainty surrounding the reviews of 26 mines in the Philippines that were suspended or ordered to shut last year. The country’s mining council have once more pushed back the date for completion of the review, with the new delay meaning the results may not be finalised until August 2018. Over the last four years the Philippines have been the top exporter of nickel ore to China, therefore the mine shutdowns have drastically impacted supply of the metal. Another factor affecting the price of nickel is the impact of China’s production of nickel pig iron, a cheaper alternative to pure nickel, as output of this ferronickel is expected to increase by almost 15% to 447,000 tonnes in 2018. There are mixed views held over the potential of nickel, with optimism surrounding nickel’s use in the battery industry contrasting with the metal’s main downstream sector, stainless steel, which is looking to be attracting a price correction in nickel.

Cobalt’s price jumped significantly in March, up 15.5% to US$93,550 per tonne due to the increased demand for the metal from China. China is driving the adoption of technologies that will reduce greenhouse gas emissions, and accordingly has the world’s fastest uptake of electric vehicles.  Approximately 10kg of Cobalt is used in an electric car battery. With 2017 global shipments of electric vehicles up 50% on 2016 to 1.4 million, there is an ever increasing demand for cobalt to be utilised in this way. On the supply side, there are ongoing concerns from the Democratic Republic of Congo, where earlier this month President Kabila signed into law a new mining code increasing royalties on a number of minerals. Further supply issues stem from China itself, with 80% of the cobalt sulphates used in lithium-ion batteries being refined in China, who as recent history has shown are willing to restrict exports of rare-earth metals.

Coal fell 11.5% to finish the month at US$92.3/metric tonne, following fading demand from China as the heating season ends. Coal stocks at the major Qinhuangdao coal port in Northern China as of March 26 fell 190,000 from the week earlier. Demand may suffer further in the long term as China plans to increase renewable energy by 20% by 2030, moving from coal mining to clean energy such as solar.

Crude oil was up 6.7% to US$70.1 per barrel following expectations the Organization of the Petroleum Exporting Countries (OPEC) and other suppliers would continue to extend supply cuts for the rest of the year and potentially into 2019. Further, Iraq has announced a planned move away from oil to instead focus on private sector, affecting the future supply of crude oil.

Natural gas price dropped 15% to US$1.8/MMBTU at 31 March 2018. This is partly a result of a pipeline shortage, with oil producers unable to ship out all the gas by-product, leaving gas trapped in the Permian Basin in West Texas, pushing down prices. Supply of Permian gas have risen to an all-time high, whilst prices have dropped 30% from a year ago. Record supply levels come as a result of 60 new rigs in the basin since mid-October, boosting gas production by 20%.

LNG prices fell to US$7.0/MMBTU, a decrease of 16.7% for March. This follows a large inflow of supply of LNG from the US, creating the potential for a further period of LNG oversupply. The abundance of US natural gas has changed the exporter LNG profile, which is impacting supply contracts with Asia and Europe. Similarly, Russia has also increased its supply on LNG to the Asia Pacific region by 5.3% in 2017, exporting 15.48 billion cubic meters, representing a large increase in supply. Also this month, Shell has announced they are considering entering the Australian domestic retail energy market, which will increase competition and impact prices.

Commodity and Precious Metal Prices
Select above image to enhance the Commodity and Precious Metal Prices
Select above image to enhance the Commodity and Precious Metal Prices

Performance of WA Index and global indices

Select above image to enhance the Performance of WA Index and global indices
Select above image to enhance the Performance of WA Index and global indices

WA Index movement

Select above image to enhance the WA Index movement
Select above image to enhance the WA Index movement

The Deloitte WA Index marginally fell during March 2018 as the market capitalisation of Western Australian listed companies decreased by 1.43% to close out the month at AU$173.08bn.

Deloitte Clients & Markets Partner - Western Australia, Tim Richards, said: “While the WA Index has fallen over the previous month, it’s decreased less than the broader Australian and global markets. Market uncertainty has resulted in a high demand for gold, which is great news for many of the gold miners in Western Australia. The top three performers in the Index for March are all associated with the sector. A primary factor in the poor performance of the global indices this month revolve around the Trump administration’s tariff policies and the declining trade relations between their major trading partners.”

Major index players in March:

  • Regis Resources Limited’s (RRL) strong half year earnings of AU$84.6m (up 39% from the prior comparable period), record gold production (up 18.96%) and declared dividend of AU$0.08 all helped enhance market capitalisation this month – increasing AU$126m (5.9%). Regis also announced its Rosemont Main site had a pleasing result with 7.2 grams of gold per tonne (g/t), which approaches the 8g/t benchmark for ‘high-quality’ mine sites as prescribed by the World Gold Council
  • Saracen Mineral Holdings Limited (SAR) is another gold miner whose solid half year results facilitated a large increase in market capitalisation for the month. Saracen’s results showed net profit after tax increases of 209% from the previous half year to AU$46.0m at 31 December 2017. This was due to record gold production of 157,795 ounces (oz), up 24% from the previous year following large investment in exploration and development. The company’s market capitalisation increased by AU$135m, a rise of 10.2% from February 2018
  • Resolute Mining Limited (RSG) produced robust half year results showing revenue growth of 20% to AU$203m. Resolute remains on target to reach its year end gold production of 300,000oz as well as maintaining its all-in sustaining cost of AU$1,280/oz. The company’s market capitalisation increased by 11.7% to AU$923.14m at 31 March 2018.

The equity markets surveyed saw poor results throughout March:

  • The US S&P 500 closed off a fickle month down 2.7% largely due to growing investor fears of a trade war between the US and China. Steel and aluminium tariffs affecting approximately US$60bn of imports to the US were announced on 2 March and were passed on 23 March, both of which saw the market fall. China has since retaliated with US$3bn of tariffs on US pork, apples and steel pipes. The US banking sector was not immune to the fluctuations of the market, despite increasing interest rates and the bill to roll-back the 2010 Dodd-Frank banking legislation. Bank stocks however rallied late in March as tariff negotiations continued
  • All of the gains made in 2017 on the FTSE 100 were erased near the end of March due to escalating trade tensions between the US and China. President Trump announced the EU, Argentina, Australia, Brazil and South Korea will be exempt from the steel and aluminium tariffs, however further clarification is necessary in order to ease concerns. The Bank of England kept rates on hold this month at 0.5%, but hinted at a May hike. The FTSE 100 ended March down 175 basis points (2.4%)
  • The All Ordinaries too saw a drop early in the month due to uncertainty around the steel and aluminium tariffs. The relief from the tariff exemptions for Australian exporters were short lived as the Trump administration announced the exemptions were only temporary and all countries exempt will have quotas in place. The Australian dollar remained relatively steady through March, closing AU$0.02 down at AU$0.76/USD. The RBA also decided to keep the cash rate unchanged at 1.5% as inflation rates remain low. The All Ordinaries closed the month down 4.1% (249 basis points) largely from global trade uncertainty
  • Like the rest of the global indices, the Nikkei too was affected by the protectionist trade policies being implemented by the US. The erupting ‘trade war’ between the US and China saw the Nikkei drop by 3%, however increased discussion and negotiation between the two sides eased tension slightly, with the Nikkei ending the month down 614 basis points (2.8%). The Bank of Japan left its short-term interest rates on hold at -0.1% this month, although it does have an optimistic economic view ahead.
LED board

Top performers of the month

Western Australian top performers over the past month by growth in market capitalisation

Top performers of the month

Top performers of the month

Top performers of the month

Top performers of the month

Western Australian top performers over the past month by growth in market capitalisation

Select above image to enhance the Top performers of the month
Select above image to enhance the Top performers of the month

The top Deloitte WA Index Movers and Shakers in March included:

  • Lynas Corporation Limited (LYC) saw a large increase in market capitalisation this month of AU$363m (28.9%) following strong half year results, and a large amount of convertible bonds being exercised resulting in 68.3 million newly issued shares. Lynas’ half year earnings before interest and taxes of AU$63.0m (Prior Comparable Period: loss of AU$19.3m) meant that note holders found conversion more attractive
  • A new member to the WA top 100 index resulting from a 105% increase in market capitalisation over March is King River Copper Limited (KRC). An announcement about the high purity of its vanadium (99.48% purity) sparked high demand for King River’s stock and prices rise from AU$0.06 to AU$0.12 over the period, increasing market capitalisation by AU$75m. A core sample in late March found the company has one of the highest vanadium concentrates of all Australian deposits
  • Avanco Resources Limited (AVB) received an off-market cash and scrip takeover offer from OZ Minerals Limited (OZL) to acquire all Avanco shares, in exchange for AU$0.085 cash and 0.009 Oz Minerals shares per share. This offer represents AU$0.168 per Avanco share, previously trading at $0.08. Avanco’s market capitalisation was up AU$189m (98.7%) during March, largely as a result of the takeover bid.
Elevator Reflection

WA Index Feature Articles

CFO Sentiment | Edition 4

CFO optimism continues to hold strong, bolstered by upbeat economic outlooks – at home and in Europe and the United States. Paired with reduced financial volatility, Australia’s top finance executives have increased their appetite for risk. Despite this positive outlook however, CFOs are concerned about the impact of new regulatory changes as well as what emerging technologies like artificial intelligence might have on their bottom line.

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If you have any questions in relation to the Deloitte WA Index please contact Angela McIlroy.

Published: April 2018

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