Let’s face it … the only way is up

There’s cautious optimism things could start to head in the right direction next year after a shocker in 2014.

IT would take more than a glance into a crystal ball to see how 2015 might unfold, but there is one observation that can be made without relying on artificial assistance – next year cannot possibly be worse than 2014.

No-one needs reminding of the damage caused to the Western Australian economy by collapsing iron ore and oil prices, or to the companies exposed to those commodities.

However as the old year slips by there are some forecasts worth considering, with the most important being that we are close to the bottom of the commodity-price cycle, a fact demonstrated by the exit of high-cost mineral producers and the mothballing of plans for new projects.

What that probably means is that the recovery will start in 2015, however weak it might seem, with confidence picking up around mid-year.

But before we get to the turnaround a number of industries, companies and individuals will face a testing time, as will both the state and federal governments.

Premier Colin Barnett and Prime Minister Tony Abbott will be among those feeling intense pressure as the state and national economies slide towards recession. If it wasn’t for their over-developed political egos, those two men might give a fleeting thought whether it’s worth persevering, or whether it’s time to exit the stage.

Both will be hoping that a number of potentially positive developments come to their aid, starting with the Australian dollar continuing to behave as the ‘automatic stabiliser’ it is supposed to be, with the recent fall to around US82 cents likely to be the start of a decline into the 70-cent range, then possibly into the 60-cent range.

For most exporters a lower dollar will be a big boost to Australian dollar revenue and confidence.

Gold, often a rescuer for WA in tough times, might even head into record territory, with the current price of $US1,222 an ounce converting today to $A1,490/oz. If the Australian dollar drops to the US75-cent mark expected by Reserve Bank of Australia governor Glenn Stevens, the local gold price rises to $A1,629/oz. At US65 cents, the local gold price hits $A1,880/oz.

The currency effect is the same as a pay rise for exporters, though it does mean that imported capital goods will be more expensive.

Agriculture, if it rains at the right time and in the right amounts, will also be a winner from the falling dollar; a point underlined by recent investment moves by wealthy Western Australians such as Andrew Forrest and Gina Rinehart, who have been bulking up their exposure to farming.

Two other changes in the underlying conditions affecting WA business could help with the 2015 recovery.

Interest rates, rather than rising, which has been the fear for some time, could take another step down if the RBA is confident that such a move would not further inflate an already over-inflated property market, and the lower oil price will put downward pressure on transport costs – unless offset by the falling dollar.

Potentially, the outlook is for a series of significant external forces helping WA. Commodity prices cannot fall much further and are more likely to recover. The dollar will fall. Interest rates might fall, and fuel could be a little cheaper.

Southern surprise

FOR corporate WA, 2015 should also be a time of significant change, starting with the arrival in Perth of a new world-class company, BHP Billiton spin-off South32.

Widely regarded as a business stuffed with unwanted leftovers, South32 has the potential to be a surprise performer, potentially delivering a better financial performance in the early years than its parent.

The difference can be measured in BHP Billiton retaining iron ore, oil, copper and most of the coal assets – with three of those (iron ore, oil and coal) being hit by excess global production and very low prices.

South32, on the other hand, has an assortment of manganese, silver, nickel and coal and will have the advantage of starting life almost debt free.

Once the spin-off is complete, it is possible to see South32 entering into an after-float deal to acquire the Nickel West assets in WA, which BHP Billiton has so far been unable to sell.

Other big WA companies could also have an interesting time in 2015. Wesfarmers will be under increased pressure from institutional investors to start growing and stop returning capital. Woodside Petroleum will be battling low oil and gas prices and Fortescue Metals Group will remain in a cost-cutting mood as it suffers from shrinking cash flows and high debt levels.

Two big mining operations yet to reveal how they will handle the low iron ore price could be forced to make changes next year, because the Karara project of AnSteel and Gindalbie, and the Sino Iron project of Citic Pacific are being severely buffeted by market pressure and closure is not out of the question.

A little less wealthy

A time of change could force WA’s ultra-wealthy to make some tough decisions, and trim their luxury lifestyles.

Andrew Forrest, once a $6 billion man, is now a $2.4 billion man; and while wealth of that sort is something everyone else can only dream about, the fall is severe and could get worse if the financial community forms a gloomy view about the performance of FMG.

Gina Rinehart, Australia’s richest person, will face tests on two fronts.

Her new flagship mine, Roy Hill, will start production in a depressed market; and while the project is expected to be profitable even at the current low prices, the start-up period will be closely watched – because if anything is to go wrong, that’s when it could happen.

Mrs Rinehart could also find that the long-running dispute with two of her children might finally come to a head; and while an out-of-court settlement appears to make sense, the matter could be brought to a head in a classic courtroom showdown.

Kerry Stokes is another member of WA’s rich elite facing an interesting time, with equipment sales at his WesTrac business down and likely to stay down, advertising in his media assets down and likely to stay down, and his embryonic oil division being buffeted by low oil prices – which might prove to be a positive as assets are going cheap these days.