Rio kicked off H1 reporting for the major miners, announcing record-breaking profits off the back of a sky-high iron ore price. Underlying earnings was US$12.2 billion, with US$10.2 billion of free cash flow. The company has moved into a net cash position of over $3 billion. Rio is a debt-free, money making machine right now.
The company announced a monster interim dividend of US$5.61/per share (A$7.62). With a closing share price of $133.42 on Friday, that’s 5.7% of the share price (on a semi-annual dividend). The average realised price for iron ore was US$168/t over the half. And even though it has retraced a little sharply very recently (from US$220 towards US$180/t), needless to say it still remains at extremely positive levels for Rio. Its smaller aluminum and copper divisions also did well on the back of rising prices.
The announcement brings home just how profitable our mega miners are amid the current commodity price surge. Their volumes are high, costs are low and capital management prudent. They’re perfectly placed to deliver rivers of gold to investors. The market is keenly watching BHP and Fortescue for their announcements to shareholders after their H1.
The skeptics look to have had their pants pulled down as the crash in commodity prices remains elusive. Or if it does come, will miners have paid out so much cash to shareholders that it won’t really matter?
As well as interest rates, an important factor affecting house prices is the level of demand versus supply. If lots of houses/apartments are being built without sufficient population growth, that will tend to put downward pressure on prices and vice versa.
Amid travel restrictions, net overseas migration has plummeted and therefore so too has Australia’s population growth. This looks to have been further augmented by slowing births as women delay pregnancy amid the current economic/political uncertainty. That says physical demand for housing has hit the brakes. Population growth over the year ending Dec-2020 was 136,000 compared to 387,000 a year prior. A massive slowdown.
On the other end of the spectrum, new supply of housing has continued on pretty healthily. In fact, the HomeBuilder stimulus has seen new building activity for detached housing increase. Approvals and commencements have increased, which means completions will soon follow. It is completed dwellings that effectively add to housing supply, as they can be lived in.
So effectively, new demand for housing has slowed while supply has remained very healthy, with completions running at around 200,000 per year. In 2020, completions were around 182,000 compared to 136,000 population growth! That’s more than one dwelling for every person!
In this case, we can ask how can there be a rental market squeeze, of which the anecdotal data is supportive of! SQM Research says that at the national level, rents for 3-bedroom houses have increased by 11.8% annually and 7.5% for 2 bedroom units! Meanwhile vacancy rates have been trending lower to 1.7%. So the evidence on the ground is that despite our low population growth, the rental market is on fire.
What gives? One argument is long-term rental stock is being converted to AirBnBs to meet hot local tourism demand (amid a lack of overseas travel), effectively taking that stock out of the rental market (and to the tourism market). Another argument is that household preferences have shifted. Amid lockdowns and WFH, people are less likely to want to be in a sharehouse as opposed to their own place. This would effectively increase rental demand. Yet another reason, similar to the second, could be an increased rate of romantic separations (again supported anecdotally) increasing demand.
All-in-all, the proof is in the pudding, which is that the property market is red hot both in terms of prices and rents. However, the longer term outlook may be more sanguine. A lot of the factors I just referred to could be short-term in nature. After they settle down, strong building activity relative to population growth may take precedence. That would be expected to put downward pressure on rents and prices. Add in the prospect of higher mortgage rates and you could make a case for the next correction being in the works.
The stratospheric rise in commodity prices has largely been met with disbelief and skepticism. Yet, the iron ore price remains around US$220/ton while other commodities have been buoyant as well (copper, nickel etc).
A lot of the strength has been to do with stimulus in China coming out of the CV-19 shock. But to my mind, an underrated factors has been the increase in money supply around the world due to central bank actions. This is the ‘money illusion’; i.e. if there is twice as much money supply, prices will be twice as high. There’s no doubt money supply has increased significantly over the past 12 to 18 months. As an example, money supply (M0) in the US increased from roughly $US3,500,000 million pre CV-19 in early 2020 to 6,041,900 million currently – not far off doubling.
Is there any wonder we have seen inflation and asset prices go up? A major driver of the 5.4% annual official inflation figure in the US has been an increase in the price of used cars (by circa 45% p.a.). Are the used cars worth more or is the currency worth less? Similarly, the crazy house price increases seen around the world make more sense when we consider the money creation that has taken place and the record low borrowing costs.
Seen in this lens, the commentators expecting a normalisation of the iron ore price to under $100/ton are playing yesterday’s game, in my opinion. This isn’t 2014/15 anymore (the last time the iron ore price crashed, down to US$40/ton), this is a very different world and I suspect we are not going back.
Commodities have been one of the few remaining areas of value in the market in 2021 in my view. I’ve been buying into resource stocks in recent months as I’ve seen them as the best value. We are also moving into dividend season after what should be a record earnings season and I’m expecting some huge payouts. BHP is one I’ve been adding to this year, which hit a new high on Friday not far off $52.
CoreLogic confirmed the property boom continued apace as we close out FY2021.
Unsurprisingly, lending for housing has exploded. Owner-occupiers, spurred by grants, were the first movers. Now investors are joining the party amid cheap mortgage rates and a galloping market. The gains beggar belief…
Who knows what this FY will bring! We’ve been on a wild ride lately…