Corporate profits miss buoys ASX200 & why are iron ore and brent crude so low?

The Australian Bureau of Statistics (ABS) has released its latest private sector data tranche for March 2024, and here’s an interesting tidbit for energy shareholders.

Company expenditure on petroleum exploration in March increased by 48.3%.

However, Head of Advisory ANZ at Rystad Energy, Perry Wilson, pointed out the methodology ABS used to get to that point distorts the true numbers.

“The trend adjusted numbers are a little fudged,” Wilson said.

“The real spend increase is closer to 14%, but the henderson-moving average approach which the ABS uses throws it off a bit.”

Higher spend in petroleum exploration was whittled down to two significant factors: increased activity in the NT Beetaloo Basin, and, ongoing activities offshore WA.

But as for materials, in the same period, spend on hard rock exploration dipped -2.2%.

Meanwhile, Australia’s current account balance deficit has increased to $4.89B, as the country imported more goods in March and exported less. Export declines were significantly driven by lower iron ore and coal production onshore.

Looking at the entire economy, Australia’s quarterly corporate profits data significantly missed expectations for the period ended March 31.

Analysts were predicting that company gross profits would fall -0.9% in the March data. Instead, analysts got a bigger miss, at -2.5%.

The market appears to be treating the figures as evidence of a cooling economy, which could mean the RBA is able to justify a rate cut in 2024. Following the release of the data, the ASX200 immediately pared off losses, though not enough to get into the green.

So far, the market has been pricing in basically no cuts until 2025 (obviously, there are some standout bulls saying otherwise.)

Looking at iron ore and oil

In lunchtime trades on Tuesday, Energy was getting smashed, down -1.27%; while Materials was the second biggest faller, down -0.63%.

So what’s going on? In short: energy stocks are responding to Brent Crude movements, while the materials sector is absorbing 6-week low iron ore prices and a general sell off across metals on early Tuesday arvo.

If you’re reading about commodities, you likely already know the main components of the story for both products – demand, supply, and China. Let’s do a speed run through both.

Iron Ore

• The price of iron ore is at six-week lows on the Singapore Exchange (SGX)
• The SGX Iron Ore CFR China 62%Fe Fines contract is at US$111.15/tn
• The last time it was at this price was mid-April
• Weakness from China is the foremost catalyst as recent stimulus measures for the country’s property sector have failed
• This comes even as manufacturing data out of China on Monday shows a gradual recovery
• That gradual recovery is not translating into the property sector, keeping speculative assessments of iron ore demand subdued
• The Australian Government expects prices to go as low as US$60/tn in 2025, according to the budget

Brent Crude

• The price of brent crude is at four month lows
• The brent futures price is at US$77.10/bbl as at 12.30pm AEST
• The last time it was this price was in early February
• OPEC+ announced on Monday it would ease production cuts starting in October
• This is coupling with an oil market already pricing in lower demand from China given that country’s ongoing issues
• Supply boost announcements from OPEC+ have been enough to overpower the conflict premium brent crude is known for
• Economic weakness in the US, hinted at by contracting manufacturing activity, are also turning bulls into bears