re: Ann: Marengo Restructure to Redomicile to...
Andrew Forrest joy as money grows on US trees
FEDERAL Reserve chairman Ben Bernanke will have zoomed straight to the top of Andrew "Twiggy" Forrest's Christmas card list.
Twiggy's arguably got 600 million large reasons for thanking the dour-visaged technocrat. At least, for the moment.
Not so our assorted retailers, such as Solomon Lew and his metro-man Mark McInnes, Bernie Brookes at Myer, Paul Zahra at David Jones and Gerry Harvey at, where else, Harvey Norman.
A week back, Bernanke turned on the money tap for the fourth time. This time he says he's going to leave it on for as long as it takes.
As BHP Billiton chairman Jac Nasser said in a different context: "There will be consequences." They will be many and varied, many of them will be unintended if not outrightly disastrous.
But two, though, are already obvious. Indeed, they are all too clearly "intended". Although they are not intended specifically for us. The Fed printing US dollars has the effect of sending the value of the US dollar down. And so, by definition, the value of other currencies against the US dollar, including the Aussie, go up.
A falling US dollar also, by definition, sends the price of commodities in US dollars up. The most striking example was gold, which leapt nearly $US100 after Bernanke's move. It is now just shy of $US1800 an ounce.
At the other end of the commodity spectrum, the price of clunky iron ore, which had fallen below $US90 a tonne and was teetering, bounced straight back above $US100 a tonne and indeed, for a short period, went above $US110 a tonne.
Thank you very much, said Twiggy. He went into last weekend "talking to his bankers". The fall in the iron ore price had threatened to put his Fortescue Minerals Group in breach of its debt covenants.
Thanks to the changed environment, he emerged from the weekend with a mammoth $US4.5 billion ($A4.3 billion) new loan, which paid out all his existing bank borrowings and provided Fortescue with nearly $US1 billion extra.
And, crucially, no more pesky covenants. He paid a hefty price. His US dollars carry an interest rate of just over 5 per cent.
The big two, BHP Billiton and Rio Tinto, have been able to borrow US dollars at only 1.625 per cent. But it lifted a cloud over Fortescue. It went into the weekend with its shares suspended from trading at a last sale of $2.99. It came back with a rush and closed the latest week at $3.61.
That dropped close to $A600 million into Twiggy's kick. True, it was just getting back the $A500 million he'd dropped in a single day's trading the previous week leading up to the suspension.
But thanks, Ben.
Not so for retailers. Now, intuitively, you'd think a strong Aussie dollar would be good for them. Most of what they sell is imported.
So you'd think they could cut prices and sell more. It hasn't turned out that way for two broad reasons.
First, has been the growth of online retailing. Those direct imports are also cheaper and they mostly don't pay GST. So the stuff in Myer, Harvey Norman, JB and the rest is cheaper, but plus 10 per cent.
The second, bigger, problem with a strong dollar is that apart from the actual goods, all the other bricks and mortar retail costs are in Aussie dollars.
The biggest are wages and salaries and rent, followed closely and painfully by rising power costs.
So they may sell more actual product, but as the profit reports have shown, they end up with fewer actual dollars through the till. Yet their costs are higher.
The big question, for both the Fortescues (and their bankers) and the retailers, is whether the Bernanke effect lasts. The big, big question, and the even bigger unknown, is what happens in China.
Bernanke headed the China question off at the pass, so to speak. Commodity prices were sliding and our dollar was just starting to slip, because of signs of the Chinese economy slowing. Then there's the Reserve Bank. It will spend the next three days assessing whether to cut its official interest rate. It will decide by Wednesday and we will find out on Tuesday week.
Retailers have been calling for a rate cut, indeed, cuts. They should be careful what they wish for. I doubt that a big plunge in the Aussie dollar would send shoppers streaming back into their stores.
