Why The Commodity Crunch Could Be Worse Than Expected For Australia

A new report by Goldman Sachs analyst Matthew Ross discusses how weak earnings numbers from several Australian companies have influences Goldman’s view of the commodities environment. Ross believes the latest news indicates that the commodity weakness may be having a bigger impact on the Australian economy than the firm previously had feared.

The numbers
The ASX 200 severely lagged global markets last week, falling 3.9 percent versus only a 1.0 percent loss in the U.S., a 1.3 percent decline in Asia, and gains of 1.3 percent in Europe and 1.2 percent in Japan. Overall, 85 percent the ASX 200 traded down last week, a staggering percentage.

Commodity spill-over
According to Ross, much of the weakness in the Australian market is due to commodity prices weighing down the economy. Prior to last week, Goldman had discusses three risks to the Australian market that the firm believed were “mispriced.” The list included margin headwinds due to Australian dollar weakness, weakness in the housing market and “greater than expected spill-over from the commodity correction with a heightened risk of impairments.” Ross believes the third concern has now become validated by the market.

Market moves
Rio Tinto Plc RIO reported numbers that were mostly in-line with Goldman’s estimates, but the company was able to reduce costs by 10 percent more than Goldman expected.

Orica released fiscal 2015 guidance that fell 10-15 percent below Goldman’s expectations.

Downer was never more appropriately named, as the company has demonstrated sustained pricing and volume pressure. Goldman reduced its fiscal 2016 EPS estimates by 16 percent.

Financial earnings headlines in Australia have been dominated by Australia & New Zealand Banking Group’s news of an unexpected $3 billion capital raise and a startling 17 percent increase in mortgage delinquencies reported by Genworth Mortgage Insurance Australia.