In Brief: Online Retail, Expensive Equities, Iron Ore, Base Metals & Agriculture

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Online threat for Australian retailers; Australian sharemarket overvalued (?), forecasts for iron ore and base metals & a bright outlook in 2024 for agriculture.

-Incumbent retailers face online sales threat from Amazon and Temu
-Australian equity market overvalued, cautions UBS
-Iron ore and base metals forecasts
-Bright 2024 outlook for agricultural commodities

By Mark Woodruff

Incumbent retailers face online sales threat from Amazon and Temu

As more Australian customers gravitate to Chinese shopping website Temu, and more brands join with Amazon (and delivery times continue to shrink), Jarden suggests domestic competitors will need to lift investment in logistics to even stay relevant.

Consumers are increasingly starting their search for items online, with total audiences up, despite online sales being weaker, observes the broker.

Amazon held a 42% share of the around $12bn of gross transaction value ((GTV)) generated by the top-six major marketplaces in Australia during 2023, while Temu has become a top 20 site, after less than 12 months.

The analysts forecast these two companies will move to just over 16% share in Australia in 2024, but ominously, they currently command around 50% of online sales in the US.

In combination, Amazon and Temu create more price competition, become a first point of call for consumers and offer high-value delivery, explain the analysts, who anticipate a combined GTV north of $6bn in 2024.

To maintain leading market positions, Coles Group ((COL)), Kogan.com ((KGN)), Wesfarmers ((WES)), Harvey Norman ((HVN)) and JB Hi-Fi ((JBH)) have the greatest need to invest in logistics, according to Jarden.

As freight, fulfillment and last-mile costs continue to rise, the broker points out the ability of sub-scale retailers to service consumers effectively, while also generating an adequate return on invested capital (ROIC), is set to become challenging. The cause for such retailers is also being hindered by the emergence of the value shopper in the current economic backdrop.

Thankfully, the analysts still see opportunities in Australia for the likes of Woolworths Group ((WOW)), Wesfarmers, JB Hi-Fi and Temple & Webster ((TPW), given strong store networks, scale, a differentiated offering, along with value positions.

Also less at risk are bigger-ticket retailers, suggests Jarden, selling large hardware and appliances, along with the audio visual (AV) and furniture categories.

Based on the US experience, the broker sees the greatest risk for general merchandise, office, small appliances & accessories, toys, beauty, home & kitchen, sport, outdoors, health, and food that may be stored safely at room temperature.

Jarden has previously stated most at risk are Adairs ((ADH)), Accent Group ((AX1)) and Kogan.com.

While the Amazon/Temu impact has been muted so far, the broker points to declining GTV’s for Kogan.com, Wesfarmers-owned Catch, and eBay, with a strong retail backdrop disguising the impact for others.

Based on recent data, Jarden believes Catch, Kogan.com, Harvey Norman, Big W and Home Hardware are most at risk based on cross-shopping, whilst Universal Store ((UNI)), The Reject Shop ((TRS)), IGA and Coles Group are less at risk from Amazon.

On the flipside, it's thought Breville Group ((BRG)), a2 Milk Co ((A2M)) and Treasury Wines Estates ((TWE)) should benefit via having more channels to market. 

Overall, Jarden believes the main supermarket chains (i.e. Coles, Woolworths and Metcash) are least at risk.

Australian equity market overvalued, cautions UBS

Given a challenging economic backdrop is placing downward pressure on company revenues, while cost pressures continue to broaden, UBS suggests equity market pricing in Australia has become overly optimistic on the back of prospects for lower interest rates.

The ASX200 has rallied 11.6% since last-October’s low, in the absence of either earnings upgrades or improving macroeconomic data, observes the analyst. It’s felt positivity has been almost entirely driven by lower bond yields.

Undermining claims by some that US stocks are more overvalued by comparison, the broker points out if US sector weights were applied to Aussie stock valuations, the Australian equity market would sit at a 20% price earnings valuation premium to the S&P500 in the US.

Global investors have retreated from Australian shares over the last year, and the analyst sees no reason for them to return in 2024. Until the equity risk premium increases, after falling to a decade low, it’s felt marginal buyers may be scarce.

History also presents a potential barrier, according to UBS, as the Australian equity market hasn’t traditionally bottomed until after the Reserve Bank resumes its rate-cutting cycle.

Looking across the sectors, the broker notes share prices within Banks and Retail have run hard over recent months, despite relatively static earnings estimates for FY24 and FY25.

Post-covid, the analyst is dubious around retail sales (which are still sitting above trend), and the arrival of international tourists is still failing to match the pre-pandemic trend.

Narrowing the focus to individual stocks across the market, UBS suggests share prices have moved ahead of earnings for Neutral-rated CommBank ((CBA)), Cochlear ((COH)) and REA Group ((REA), as well as James Hardie Industries ((JHX)), which is still assigned a Buy recommendation.

Iron ore and base metals forecasts

It is becoming increasingly apparent China’s growth trajectory, and hence any further upside for iron ore and base metal markets, has become very policy dependent, observes Citi.

While more accommodative monetary policy is needed, the broker suggests upside risk to metals demand in 2024 will be more tied to fiscal/quasi-fiscal stimulus, which is the next thing for investors to monitor.

Last week, base metal and iron ore markets rallied after the People’s Bank of China (PBoC) moved to cut the reserve requirement ratio (RRR), while Beijing’s rescue pledges also buoyed sentiment, explain the analysts.

Citi observes policymakers in China are broadening the scope of urban village redevelopment (increased to 52 cities), part of three major projects intended to offset the weakness in the property sector.

The iron ore price reached US$136/t in Singapore last week (Cit’s 0–3-month forecast is unchanged at US$150/t), and any further policy easing could lift the price further. The Chinese New Year in mid-February is also expected to lend support to market fundamentals.

For copper, apart from upside risks from further Chinese easing, tighter concentrate supply is also behind the broker’s US$8,800/t forecast (for 0-3 months), up from US$8,500/t.

For quarter’s two and three of 2024, copper prices are forecast to average US$8,000/t, Citi anticipating rising debt service burdens for developed markets, and associated deterioration in growth.

Regarding the short-term outlook for aluminium, the broker keeps its 0-3 month forecast at US$2,300/t. Large uncertainties on the supply side are noted, and developments surrounding potential actions on Russian aluminium could cause price volatility.

Bright 2024 outlook for agricultural commodities

Radobank’s Australian Agribusiness Outlook report for 2024 points to strength for the sector, due to lower input costs and better than anticipated seasonal conditions. 

These positives are set to outweigh ongoing tightness in the domestic labour market, the impact of geopolitical issues on freight and concerns around China’s economy and import volumes.

“El Nino didn’t turn out as bad as feared, with recent significant rainfall received across most farming areas except Western Australia”, explains Stefan Vogel, General Manager of Australia and New Zealand. It’s felt grain farmers will now be more optimistic around plans for the upcoming planting period for winter crops like wheat, barley and canola.

For beef and sheep producers, Vogel also notes the “outlook for farm-grown feed in the first half of 2024 overall looks more promising”.

While agricultural commodity prices remain well down from 2022-highs, the Radobank Rural Commodity Price Index indicates improvement in 2024 to around the five-year average for the Index.

Prices will vary by sector, with grain prices remaining under pressure from oversupply in 2024, with higher prices dependent on weather-related supply shortages, explains Vogel.

More positively, beef and sheep prices are expected to trade above lows experienced in 2023, and global dairy commodity prices are thought to have bottomed and should improve during the year.

In Australia there should be ongoing support for farmgate prices; the margin outlook for dairy farmers remains positive.

While crude oil prices have remained “surprisingly subdued”, according to the bank's outlook, despite heightened Middle East tensions, any escalation of international conflicts has potential for a big upward swing in energy prices, which would have a knock-on increase in the cost of farm inputs.

Locally, cost pressures for imported inputs and goods used on the farm will ease should the bank’s forecast for a rally towards USD/AUD 70 cents eventuate in the next 12 months, after bottoming out at around 65 cents.

Radobank also expects a decline in agricultural chemical prices, driven by a “massive” increase in production capacity in China over the past three years, though it may take some time to be felt at the farm gate, as older stock is run-down.

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