The Markets
This week: ASX v Wall Street
FYTD: ASX v Wall Street
We were able to stretch our legs a a little this week, as we attended the Macquarie Australia Conference.
Why do approximately 100 analysts flock to lock themselves in four conference rooms for three days?
Well, the conference serves as a “mini” reporting season, with companies taking the opportunity to provide updates on their operations. Conditions on the ground are rapidly shifting, be it conflict in Europe, wage pressure domestically or lockdowns in China. With uncertainty is high, this year’s conference was well attended.
It won’t surprise readers that once again the topic du jour was inflation: where companies are seeing it and what they can do, or are doing, about it.
However, outside of this, it was interesting to see some of the themes we highlighted in our latest CIO event that have shaped portfolios, beginning to shape the corporate landscape.
The conference provided many real-world examples of where companies are beginning to adjust to these shifts:
Ukraine: beyond the headlines
Supply chains are continuing to re-orient, reorganise and restructure as the globalisation of the past three decades is put in reverse.
Worley was incredibly positive on capital investment in oil and gas. It is seeing a strong increase in front end work relating to offshore oil and gas investment (after years of muted investment) as well as in LNG production.
Much of this investment has been sparked by the recent crisis in Ukraine, with Europe (the European Commission) looking to fast-track investment in order to be independent of Russian oil and gas “well before 2030”. As we know, increasing the supply of any resource is not as simple as flicking on a switch – it will take time and require a significant amount of engineering and design work to begin as soon as possible. Worley and MMA Offshore should benefit from this.
In the meantime, the lag between demand and supply bodes well for the energy exposures in our portfolios, including Origin and Seven Group (through SGH Energy and Beach).
Concrete, cement and aggregate producer Adelaide Brighton provided further insight into how supply chains are beginning to reorganise. It is seeing the value of its quarries and local supply enhanced, with sourcing becoming increasingly difficult and supply chain difficulties resulting in a shortage of local materials (for instance, sand in Victorian quarries). It is seeing companies begin to value its sourcing and local supply more – with many reverting to local supply in favour of “direct” arrangements.
A good example of this can be seen in its recent agreement to continue to supply lime to Alcoa – which previously looked to terminate its contract in favour of cheaper imports.
COVID-19: longer structural shifts
While much of the world is getting back to pre-covid “normal”, some behavioural shifts might be here to stay. One of these is the strong shift to online purchases.
Endeavour continues to see a strong preference for at-home consumption and premiumisation trends are continuing.
Furthermore, it sees the strong shift to online sales as an enduring one.
Likewise, Wesfarmers is accelerating investment into its digital ecosystem, as it looks to bring together the digital experience of its brands (Kmart, Bunnings, Target, Officeworks) into a single customer ecosystem, bringing benefits to its customers as well as digital insights.
We also heard about how costs to acquire customers online continue to escalate as more and more companies are vying for eyeballs and Google “adjusts” its pricing accordingly, driving up marketing costs.
Inflation
Cost inflation is appearing across all facets of the economy, be it labour, raw materials, freight and supply chain. There is nothing new here. However, there was a much stronger focus on labour inflation, with absenteeism remaining high and several businesses operating below capacity as a result.
We saw examples of this through Costa, which is dealing with labour challenges in China, as well as Inghams, which has had to change its product mix due to labour constraints. Both companies are beginning to see these labour pressures ease more broadly and we are optimistic there is upside as they successfully pass these cost increases on.
Reliance is a great example of this. Its strong value proposition to both customers and distributors has seen it pass cost increases of approximately 10% over the year to compensate for inflationary pressures – and it indicated it expects to preserve its margins in the coming years.
In general, “pricing power” is a concept we are finding the market is struggling with. However, those companies that have this are being rewarded – Amcor being a good example this week, “re-rerated” after it demonstrated a degree of pricing power.
Energy transition: battery metals and electric vehicles
Support for the level of investment that is required to facilitate the energy transition in Australia continues to rise.
We had the opportunity to hear from the NSW Minister for Energy and Environment, who spoke about his government’s ambitions to catalyse the energy transition.
Expounding on New South Wales Electricity Infrastructure Roadmap, it was clear that there is considerable government appetite to provide the capital needed for the infrastructure required to support the transition. The minister made it quite clear this is very much a bipartisan effort.
As part of this, the NSW government has committed to several policies, including more than $171m spend on fast charging areas in urban and regional areas as well as government rebates for electric vehicle purchases.
And while we are earlier along the road to adoption in Australia, it is clear that demand overseas is booming, with VW sold out of electric vehicles in the US and Europe (customers ordering today will not receive their vehicles before 2023).
Of course, this is a function of both demand and supply.
From the supply side, there is a need for battery materials and resources that is driving prices significantly higher as supply struggles to keep up.
Pilbara Minerals provided an example of this, expounding the strong demand for lithium. Auctions for lithium ore run through its BMX platform have seen sub-benchmark grades achieve much stronger prices than much of the market anticipated, as processors look to fill the considerable capacity that has been built out in China.
We are also seeing the impact of an uptick in capital investment and exploration across the resource sector in response to higher prices. This was reflected in Seven Group’s update – who are seeing strong demand for parts and component rebuilds, as well as Imdex which is seeing good demand for drilling equipment. We saw upside for Emeco in Seven’s update – as fleet renewal trends make rental a more attractive proposition.
Companies are also making proactive decisions to reduce their carbon footprint. However, beyond the broader social imperative, it is becoming clearer that companies are beginning to head in this direction because the economics are making more and more sense – for instance, Sandfire Resources plans to supply energy to its MATSA complex from solar energy, and Adelaide Brighton is looking to employ alternative fuels at its Birkenhead facility.
Conclusions
We think many of these structural trends have some time to play out yet. However, insights from the Macquarie Australia Conference show that companies are already being shaped by what we see as a new paradigm in the global economy.