Dead cats don’t bounce. Nor do sharemarket rallies that start in Australia — and run and run — and then reverse in the final hour of trading on Wall Street to leave us no better placed than 24 hours earlier. For a while there last night, it looked as though China’s fifth rate cut was well timed — adding to the already-rebounding markets in Europe and helping give the US markets a solid start. That was after a big rally across Asia, starting with Australia (up 2.6%, yaaaaa!) and then to Japan, South Korea, Taiwan and even Hong Kong — but not China, where the Shanghai market dropped more than 7% (after Monday’s 8.5% plunge).
Europe closed sharply higher gains of 3% to more than 5%, the US started 2% up, and then in the last couple of hours of trading the relief rally ran right out of puff, and Wall Street actually dipped into the red in the final 30 minutes before closing sharply lower with nasty little losses. The Dow traded through a daily range of more than 604 points to finish 205 points lower. Our futures market took fright as well early this morning, and swung from being up more than 50 points to starting with a loss of more than 50 points. Oil rose, then faded; gold sold off. We are back to where we were a day ago. So it’s all eyes on Shanghai again to see if the Chinese rate cut and boost to liquidity can work their magic. The previous four haven’t helped at all. — Glenn Dyer
Desperate China. China’s central bank has cut interest rates five times now since last November, and it hasn’t stopped the following from happening: manufacturing activity falling to a six-year low; producer price deflation deepening; and the sharemarket tanking, giving up all of 2015’s gains. The cuts, though, seem to have steadied a sinking property sector. But investment and industrial production have both fallen this year. Last night’s fifth cut is aimed at calming nerves fractured by the 16% plunge in Chinese markets on Monday and Tuesday (the fourth cut two months ago in late June was aimed at the same target — and the market is down more than 40% from its June 12 peak). China also added liquidity to the financial system and cut the reserve ratio for bank to encourage more lending and got rid of another control on short-term interest rates. — Glenn Dyer
Don’t pine for BHP. BHP reported a sharp fall in profit (though its dividend lifted slightly). But buried in the results was more striking evidence of just how profitable its iron ore business is, despite the slide in prices and the weakness in China. The company said in the fine print of yesterday’s profit report that its Western Australian iron ore business cut cash costs 31% to US$19 per tonne in the year to June, thanks to “reductions in labour, contractor and maintenance costs, lower diesel prices and a stronger US dollar”. And BHP is aiming to trim that US$19 a tonne figure to US$15 a tonne by next June.
The average cash cost was actually US$17.01 a tonne in the six months to June. Prices fell 40% in 2014-15, while production rose 14% to 233 million tonnes. The end result was that BHP’s iron ore business remains immensely profitable, even with prices around US$50 a tonne — as profitable as the mighty Apple (but still behind our big banks). BHP’s iron ore business had earnings before interest, tax, depreciation, amortisation of US$6.93 billion on revenue of US$14.75 million, a gross margin of 47%. That was down from 57% in the year to June 2014, and more than 70% two years ago. By the way, rival Rio Tinto is doing even better. In its interim results released earlier this month, it revealed average costs at its WA iron ore business had fallen around 25% to US$16.20 a tonne from US$20.40 a tonne in the first half of 2014. The WA iron ore business had a gross margin of 58% in the June half, down from 66% a year earlier, but still fat and as profitable as the big banks. — Glenn Dyer
But no rate rise looms in Kiwiland. Reserve Bank of New Zealand deputy governor Grant Spencer has made it clear there won’t be a rate rise any time soon across the Tasman, despite the house price surge in Auckland that has resulted in a 24% jump in the past year (eat your heart out, Sydney). If anything, there will be another rate cut on September 10 when the RBNZ again announces its latest monetary policy decision. For that fearless forecast we can blame fecund dairy cows in NZ, Europe, the US and elsewhere and fickle consumers of all products dairy in China and other parts of the world. — Glenn Dyer