Australian Stock Market Report – Midday August 29, 2014

Iron Ore Mining — A miner holds a lump of iron ore at a mine located in the Pilbara region of Western Australia in this December 2, 2013 file photo. World no. 2 iron ore miner Rio Tinto said on July 16, 2014 expansion work at its mines and productivity gains led to a sharp rise in iron ore output as it steps up shipments to Chinese steel mills. Picture taken December 2, 2013. REUTERS/David Gray/Files

Local shares flat with iron ore at 2-year low

The Australian market is unchanged at lunch, with weakness from the mining sector and consumer staples holding the broader market back. Shares in the US fell for the first time this week while remaining near record highs. Stronger than expected US economic growth last night was offset by tensions in Eastern Ukraine. US markets will be shut on Monday for a holiday.

 The mining sector is down 0.6 per cent, driven by continued falls in the iron ore price. Ore prices have slumped for the ninth day, are at two-year lows and only ~US$1/dry tonne away from falling to a five-year low. The weaker the iron ore price, the greater margin concerns for producers of the commodity. BHP Billiton (BHP) is down 0.6 per cent, Rio Tinto (RIO) is 1 per cent and Fortescue Metals (FMG) is sliding by 0.5 per cent. Higher cost producers have been hit hardest this week however. Atlas Iron (AGO) is up 0.4 per cent at lunch but has shed 9 per cent over the past five days. BC Iron (BCI) is down 1 per cent and has slumped by 7 per cent this week.

 Virgin Australia (VAH) is up 1.2 per cent and Qantas (QAN) is surging by 5.2 per cent despite annual losses from both companies in the past few days. VAH posted a $355.6m net loss after tax and blamed the result partly on excess market capacity (the addition of flights by other airlines), weak consumer sentiment and $51.6m in costs associated with the carbon tax. Restructuring costs of $117.3m and write-downs/impairments of close to $57m also were a drag on the result. Despite having ~$1.5bn of debt on its books, VAH has a healthy cash position of $783m. VAH CEO John Borgetti said that 2014 was one of the most challenging years in the history of Australian aviation. The market is under the impression that the worst is out of the way for both VAH and Qantas (QAN).

 The major banks are the biggest contributors to gains at lunch, with the big four up by as much as 1 per cent. The owner of Australia's biggest supermarket chain, Woolworths (WOW) is down 1.6 per cent following its $2.4bn annual profit while Harvey Norman (HVN) is up 6.2 per cent after announcing a strong jump in FY14 earnings to $211.7m. Wesfarmers (WES), the owner of Coles is down 2.9 per cent or $1.30/s as it trades ex-dividend today for its $1.05/s dividend. WES is the seventh biggest company on the ASX.

 On the economic front, private sector credit in July rose by 0.4 per cent, taking the gains in lending over the past year to 5.1 per cent. Most markets in the region are losing ground, with shares in China and the Philippines the only exceptions. Japan's Nikkei is down 0.6 per cent, South Korea's KOSPI is down 0.25 per cent while Hong Kong's Hang Seng is down 0.24 per cent.

 The Australian dollar is firmer, buying US93.5c. At lunch, 1.2bn

shares have been traded worth $3.6bn. 465 stocks are higher, s71 are losing ground and 326 are unchanged.

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