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Moody’s warns Australia of slow jab risk

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A global credit rating agency has warned Australia’s economic recovery will be hampered if its COVID-19 vaccination rollout remains slow.

Moody’s Investors Service is also concerned that trade tensions with China would be a major hit to the economy if the Asian giant extends its restrictions on a number of commodities to iron ore.

In a webinar presentation, it said Australia was not keeping pace with the rest of the world in terms of the vaccination rollout, and although that hadn’t yet had a material impact on the economy, it increasingly would.

To date the vaccination program has delivered 2.47 million doses nationally.

Moody’s economist Katrina Ell said it was going to delay herd immunity and the ability to open borders for international travel for leisure, business and  education.

“If we don’t have herd immunity and we do have sluggish vaccinations, then the economy is more vulnerable to localised virus outbreaks and shutdowns and that could put the economy in a fits and starts recovery mode,” she said.

She does not expect the borders will be fully open until 2024.

“It’s going to be an ongoing thorn in the side of Australia’s important service industries until they do reopen,” Ms Ell said.

In a separate analysis, the McKell Institute estimates border closures made by delays to the vaccine rollout will cost the economy $16.4 billion.

Moody’s also warned that the geopolitical risks with China remained a risk to Australia’s economic outlook.

China has already put restrictions on Australia’s exports of beef, wine, barley, and some other goods, and in a new twist on Thursday it has suspended all diplomatic contact under China-Australia Strategic Economic Dialogue.

“If those trade barriers are extended to iron ore, that really could derail Australia’s trade revival … it does remain a key downside risk,” she said.

Turning to Australia’s booming housing market, Moody’s expects national home values to rise over 10 per cent this year.

Ms Ell expects the Australian Prudential Regulation Authority will step in to cool activity with macroprudential measures to make sure lending standards are maintained, noting that it previously set restrictions on interest-only loans and other riskier loans.

“We are expecting this to probably happen later this year,” she said.

However, she expects an interest rate rise by the Reserve Bank is still some way off, with underlying inflation remaining soft.

The central bank has repeatedly said it does not expect to lift the cash rate from its record low 0.1 per cent until 2024 and when inflation is comfortably within the two to three per cent inflation target.

“We think they may need to act a touch sooner and have pencilled in gradual interest rate normalisation to begin in the second half of 2023,” Ms Ell said.

“When interest rate hikes finally do get back on the agenda, we think that it will be very gradual. It does take quite a bit of time for those inflation pressures to really pick up and transfer over to stronger wage growth.”

-AAP

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Alan Kohler: The whaling industry shows us the future for coal

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In his pre-election speech in September 1946, Ben Chifley talked about The Coal Problem, as he called it – “a social and technical problem of complexity”.

Fair chance Scott Morrison will be talking about the coal problem again in his pre-election speech 75 or 76 years later, or at least he should be, and this time it’s both different and the same.

He got the National Party over the line on net zero by 2050 on Sunday, but only just, and the opposition to it is all about coal.

In 1946, the problem was a dire shortage of the stuff caused by the inefficiency of the mining industry and terrible working conditions leading to scarcity of labour. It was described by one MP as a “chronically sick industry”.

Mr Chifley won that election, beating Robert Menzies’ Liberal Party, and the Labor government fixed the coal problem by establishing the Joint Coal Board with the NSW government and basically taking control of the industry.

Today there’s too much coal, not too little, because many decades of burning it for energy and steel, as well as oil and gas, is turning the planet into a greenhouse.

But like the one in 1946, the Coal Problem of 2021 is socially and technically complex.

Coal exports were $5.5 billion in August, up 13 per cent in a month and almost double the previous August.

A lot of people are engaged in mining and shipping it, directly and indirectly, and the towns they live in rely on coal.

There’s no need to recite all the statistics: Coal is an important industry for Australia, especially New South Wales and Queensland, and our national power grid is geared to it.

It’s also doomed.

ben chifley 1945
Like Scott Morrison, Ben Chifley also faced a problem with coal. Photo: AAP

The International Energy Agency, among other expert and scientific bodies, is clear that there is no place for coal in a world that holds global warming to something less than catastrophic.

There is a clear choice between burning coal and having a liveable planet, and anyone leaving Glasgow next month, possibly even including our Prime Minister, will be in no doubt that the clock is ticking for the industry.

The sooner the coal industry dies, the better off we’ll be.

So the heading on Resources Minister Keith Pitt’s press release dated September 6 – “Coal industry has a strong future in Australia” – was not true.

To assist that “strong future”, the ludicrously titled Environment Minister Sussan Ley has recently approved three new coal mine extensions: at Whitehaven’s Vickery mine, at Glencore’s Mangoola mine, and at Wollongong Coal.

At the same time, Ms Ley knocked back a big renewable energy project in Western Australia.

Little wonder those companies want to dig up more coal as quickly as possible: The thermal coal price has more than quadrupled this year from $US50 ($67) a tonne to more than $US220 ($295) and there is money to be made.

But I can’t help being reminded of the scenes in The Godfather Part 2, of partying in Havana in 1958 before the Cuban revolution.

It is not a question of whether coal assets will be stranded, but when, or as Scott Morrison has put it, without thinking of coal: “For Australia, it is not a question of if for net zero, but how.”

Whaling industry shows us coal’s future

The whaling industry faced a similar fate in the 1860s after oil was commercialised in Pennsylvania in 1859.

Whale oil had lit streets and homes and lubricated machinery for a hundred years, enabling the industrialisation of Europe and the US.

It was a massive industry, supporting many thousands of families and communities, but it ended because it was both horrible and replaceable by kerosine.

Likewise coal.

Meanwhile, Scott Morrison is trying to have it both ways: Talking up the technology that will replace coal while also appearing to support the industry’s continuation.

It’s true that there is a lot of good work being done on technology in Australia, ably led by the former chief scientist Alan Finkel, as well as by entrepreneurs like Andrew ‘Twiggy’ Forrest and Michael Cannon-Brookes.

And the benefits from technology are going to be immense.

A team of mathematicians at Oxford University has just completed a study of the economic windfall to be gained from decarbonisation, based on known technology.

They estimate the net gain at $US26 trillion ($33 trillion). The faster it happens, the bigger the gain.

Faster transition pays for itself

It comes about largely because of pricing differences: “The prices of fossil fuels such as coal, oil and gas are volatile, but after adjusting for inflation, prices now are very similar to what they were 140 years ago, and there is no obvious long-range trend.

“In contrast, for several decades the costs of solar photovoltaics (PV), wind, and batteries have dropped (roughly) exponentially at a rate near 10 per cent per year. The cost of solar PV has decreased by more than three orders of magnitude since its first commercial use in 1958.”

The main insight of these mathematicians is that the “the Fast Transition is likely to be substantially cheaper” (their italics).

Technology is the answer, but Scott Morrison and his colleagues can’t keep playing both sides. They will have to choose.

You can’t credibly foster disruptive technology while also promoting the thing it’s disrupting.

You’ll get credit for neither.

Alan Kohler writes twice a week for The New Daily. He is also editor in chief of Eureka Report and finance presenter on ABC news

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‘Mountain of equity’: Millions of home owners could save thousands

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If you’ve become a home owner in the past five years it might be worth getting an appraisal – you’re probably sitting on a “mountain of equity”.

As we’re all aware, house prices have soared lately. And while that’s bad news for rapidly worsening inequality, it also means those that do own a home could save money on their mortgages, upgrade their properties or even borrow to finance that renovation they’ve been wanting to get done.

Refinancing could save you thousands in interest repayments a year.

You’ll be in a particularly strong position if you’ve also been able to keep up with your mortgage repayments during COVID, because you now own a larger proportion of a house that has rapidly increased in value lately.

It’s a virtuous cycle that’s making the gap between the haves and have-nots much larger in Australia by pushing up property prices even faster.

Owner occupiers have been the keystone of the latest property boom, with most being existing owners upgrading their homes.

Who could blame them? RateCity research published this week finds an owner occupier in Sydney who bought at the median price in 2019 with a 20 per cent deposit has now seen their wealth increase by $402,000.

Apply the same conditions to Melbourne and wealth has risen $192,000.

This assumes property owners kept up with their mortgage repayments, which the majority of home owners have done while working from home and taking part in a $300 billion government cash splash during COVID.

“Millions of homeowners are sitting on a growing mountain of equity, some without even realising it,” RateCity research director Sally Tindall said.

How to benefit

If you’re in this situation, getting the value of your home appraised could be the first step to a better home loan or moving up the property ladder.

“If you’ve owned your own home for at least a couple of years, and have been diligent about paying down your debt, you could refinance to a lower rate,” Ms Tindall said.

“Lots of lenders offer interest rate discounts to new customers with loan-to-value ratios below 70 per cent, including ‘big four’ banks CBA and Westpac.”

What’s a loan-to-value ratio? Put simply, it’s the difference between the size of your home loan and the value of your property.

So, as an example, if your home is worth $1 million and your mortgage is $100,000 you have a loan-to-value ratio (LVR) of 10 per cent.

The lower your LVR the easier it will be to refinance your loan at a lower interest rate or borrow more to purchase a higher-value property.

First home buyers might also be able to remove the guarantor on their loan sooner than they thought because of rapidly increasing prices.

About 58 per cent of the lowest variable interest rates available are open only to those with deposits of 30 per cent or more, RateCity said.

In other words, rising property prices may have moved you into the club of home owners that can achieve lower interest rates on their mortgages.

A median Sydney property purchased on an 80 per cent LVR in 2019 could now be refinanced on an LVR as low as 55 per cent.

If those conditions are applied in Melbourne, LVR falls to 63 per cent.

 

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Here’s why Australians won’t be hit by the soaring gas prices we’re seeing overseas

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Australians have dodged the bullet of skyrocketing gas prices currently hitting consumers in Europe and Asia.

While prices in the major gas hubs of those regions have spiralled up by a factor of five, in Australia a brief spike eased in September.

That means local consumers won’t be facing big jumps in household bills into next year.

Australian gas prices jumped in June and July after outages at coal-fired power plants in Victoria and Queensland boosted demand for gas generation.

That spike was short lived due to warm weather in some states and lockdowns in Victoria and NSW eroding demand, according to research by EnergyQuest.

“You’ve had warmer weather though the major capitals, the effects of the lockdowns and increased renewables, which reduced the demand for gas generation,” EnergyQuest CEO Graeme Bethune said.

Power prices fell

Those factors have also fed into power prices, with electricity costs falling in September in comparison with a year earlier.

What is interesting about the table above is that not only did average power prices drop, but the peak price charged by generators when power is in short supply also dropped.

That was despite the ongoing problems at the Victorian and Queensland power generators.

Part of the explanation is that there is increased output from renewables as rooftop solar grew, and new wind and solar generation came online.

That meant that gas power was called on less often to meet peak demand, which in turn held down power prices.

The inverse was true in Europe, where a 20 per cent fall in wind output over recent months helped run down gas supplies, contributing to the price spike, Mr Bethune said.

The future of power prices in part will depend on renewable output.

“If the wind blows strongly and there is plenty of sunshine across eastern Australia then it will keep pressure off gas prices,” Mr Bethune said.

The influence of renewables across the system in the last year is evident in this chart on power supplies.

Although wind has been stable in terms of its contribution to the power equation, outputs from hydro, solar farms and rooftop solar have risen.

The result is that coal has been pushed down from 65 per cent of power production to a record low of 60 per cent and that should help hold down both gas and electricity costs.

Even if offshore gas prices continue to spike Australian gas producers would not be in a position to push up local prices to match it.

“A lot of the export contracts for LNG [liquified natural gas] out of Queensland are set against the oil price and that has not risen by anywhere near the amount gas had,” Mr Bethune said.

“Then you have the federal government which has made clear to LNG exporters that they need to make enough gas available to the local market.

“They’re doing that regardless of the fact that they could make more money in the export market.”

Domestic users are supplied from long term contracts that cannot be easily changed when gas prices rise, so that would be another brake on prices.

However, while it is comforting to know local gas prices won’t spike to offshore levels, Australian consumers are still not getting as good a deal on prices as they should be, according to Bruce Mountain, Director of Victoria Energy Policy Centre at Victoria University.

“For small customers the gas price is not the big deal. The biggest things are the operation of the retail market and the costs levied by the owners of the gas-distribution pipes,” Professor Mountain said.

“Gas supply has been very profitable for the big gas companies.”

That was in part because consumers don’t bargain-hunt for retailers, and the charges levied to use the pipes and wires of the energy distributors are too high.

Regulators set these charges and could crack down on them but don’t, Professor Mountain said.

Since privatisation margins earned in energy distribution have increased dramatically.

Power distributor AusNet Services, under takeover offers from two groups, “is currently making a margin of 19 per cent – they’re far too profitable,” Professor Mountain said.

When power was distributed by [the state-owned] SECV there was a margin of 3 per cent on sales, Professor Mountain said.

Household power bills could be 15 per cent cheaper if the distribution businesses were less profitable, he said, with the situation similar for the gas sector.

But the move away from gas as a household fuel, necessary to reduce greenhouse emissions, will help deliver cheaper energy.

“Devices that use gas [for household tasks] are much less efficient that those using electricity,” Professor Mountain said.

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