US car market suffering, and suffering some more. The disaster that is the American car industry will be once again exposed in all its loss-making detail tonight when sales figures for June are released: the news is likely to be dramatic, and that’s putting it nicely. Toyota will almost certainly have pushed past General Motors into top position in a shrinking market. Ford, GM and Chrysler will report horror sales figures and the total market may have shrunk dramatically, perhaps equalling the terrible figures for May, thanks in large part to high petrol prices.
The US sales figures will confirm that consumers in the world’s biggest car market are reacting to high petrol prices by changing their behaviour and cutting purchases of vehicles that are too expensive to run: that’s a lesson the climate change deniers in the Federal Opposition have yet to absorb. While sales incentives such as zero financing for six years might help keep GM in front, that will be an unwanted benefit. All GM, Ford, Chrysler and also Toyota want is to get rid of huge stocks of unwanted gas guzzling SUVs and pick up trucks and boost production of smaller, more fuel efficient vehicles. Most US analysts of the industry say the June figures will show an annual sales rate of barely 13 million vehicles, more than 3 million less than the 2007 figure.
GM’s share price overnight briefly hit a 54 year low (that’s a price last seen in 1954!) before rising slightly as investors anticipated the worst. GM shares ended off five cents at $US11.50 a share after hitting a low of $US10.57 earlier in the session. That was the lowest since $US10.49 in September 1954, according to records. Private equity owned Chrysler overnight revealed its downsizing strategy, about a month after Ford and GM revealed their dramatic plans to close or idle factories, layoff employees, slash production of bigger cars and spend more money on tooling up for smaller vehicles. Chrysler revealed cuts last November after being taken over by private equity but that was well before oil topped $US100 a barrel and more and petrol went to $US4 a gallon (a record $US4.08 on Monday according to the American Auto Association). Chrysler says it is closing one Missouri plant indefinitely this fall and cut production at another due to slumping demand for trucks and other large vehicles (such as its Jeep range). Chrysler said the moves would affect 2,400 jobs. — Glenn Dyer
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Welcome to a Jekyll and Hyde economy. Don’t expect too many invitations to those quirky “Christmas in July” parties in the next few weeks. This time last year there was so much cash washing through the city’s financial hub, the end of the financial year seemed a pretty good excuse for everyone to get on the turps. Not so yesterday. As the market limped to a close, bloodied and beaten, funds managers, brokers and bankers were glad the whole sorry experience finally was over. Most funds managers will spend the next few weeks desperately trying to figure out how to disguise the sad fact that your managed fund or super fund is worth less than this time last year. — Ian Verrender, SMH BusinessDay
Rio gets a pay rise. Rio Tinto Group, the world’s third-largest mining company, won a price increase of as much as 97 percent for contract iron ore from all its Asian steelmaker customers, matching an agreement with Chinese mills. Asian steel mills will pay 80 percent more for Pilbara blend fines and 97 percent more for lump product in the 12 months that began April 1, the London-based company said today in a statement. Baosteel Group Corp., China’s biggest steelmaker, agreed the new prices on June 23.
“These agreements are a strong endorsement of the settlement reached last week and reflect the very strong demand for our products across the world’s fastest-growing markets,” Rio’s iron ore chief executive Sam Walsh said in the statement.
Iron ore prices have surged for six years, raising costs for steelmakers such as Nippon Steel Corp. and Posco. Crude-steel demand in Japan, Asia’s largest economy, will probably rise to an almost 35-year high this quarter, the government said yesterday. Rio is increasing production from its Pilbara operations in Western Australia to 320 million metric tons a year by 2012 and then to 420 million tons a year after that. It produced 145 million tons last year from the mines. — Rebecca Keenan, Bloomberg
Another note on Ponzi schemes. Last week, Paul Gregory, Macquarie’s senior spinner at its Capital Funds business took offence at this writer’s description of high-yielding listed-infrastructure vehicles as a sort of “Ponzi scheme”. Gregory stated that:
MIG rejects any comparison with a Ponzi scheme. As repeatedly disclosed to the market, MIG’s distributions are comprised of proportionate earnings from its assets, and capital returns from those assets such as the proceeds of refinancings. In MIG’s 20 June 2008 disclosure we reiterated our expectation for distributions for the year to 30 June 2008 to be covered 50-60% by proportionate earnings (post corporate expenses).
Aside from the fact that Gregory failed to dispel the comparison, one can imagine his horror when the Macquarie spinner turned to Street Talk in today’s Financial Review. Street Talk noted that Macquarie’s own Tanya Braithwaite claimed “we have been fairly strident in our view that manufactured dividends, as we would call it, are not sustainable. We are now in a position where the ability to use debt is obviously under pressure so the next few years are going to be all about having significant cash flow to pay dividends.” While Gregory may not believe Crikey’s claims (which we still stand by), perhaps he will accept the views of Macquarie’s own equity strategist. — Adam Schwab