Michael Pascoe writes:

There’s an unhappy storm brewing that has
the RBA mandarins nodding over their tea cups, savvy investors increasingly
wary and CEOs dusting off corporate histories to check how their predecessors
managed in inflationary times. Even Pete Costello is starting to admit there
are more political hand grenades called interest rate increases ahead.

With varying degrees of urgency, several of
the major profit results over the past couple of days have carried inflation
warnings. Wesfarmers, Boral and
Leightons spring rapidly to mind. All of them are having trouble managing
rising costs, most obviously fuel costs but also the rampant inflation in the
construction and resources industry.

Boral, for example, yesterday reported a 2% dip in annual profit to $362 million as the costs of fuel and the
downturn in the Australian housing industry hit. But the domestic construction
industry is and the US housing industry was booming. Boral is forecasting a similar result
this year – but US housing is now collapsing with US home builder confidence
crashing to a 15-year low amid a massive overhang of housing supply.

It was understandable that Boral’s domestic
housing EBITDA was off 15%, but Australian construction materials EBITDA
was off 2% when there is more work around in that area than there are
people and companies to do it. It smells of profitless prosperity.

Wal King at Leightons on Monday was basking
in a sharply higher profit – but the bottom line was that on $10 billion worth
of construction work, the net profit margin was only about 2.75%. Mix blokes and heavy machinery and billions of
dollars together and you get a fair amount of risk for not much reward. It doesn’t take much to go wrong to ruin the
party – remember the Spencer Street Station job?

Costello would like us to believe it’s all
just the fault of oil prices, but it looks like it’s spreading further than
that. This morning the ABS released its June quarter labour price index – official wages inflation was 1.1% for the quarter, taking the
financial year total to 4.1% (including 4.4% for the public
sector).

Annualise the June number though and you’re
looking at about 4.5% overall with the trend pointing upwards. And then
for real fun you can look at the annual wage rises in selected industries –
electricity and gas is running around 7%, mining and construction not too
far behind.

Yes, the are more uncomfortable policy days
ahead. It will take more than a free LPG tank in every boot.

Peter Fray

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