In Brief: Made In Australia, Insurance & Groceries

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Beneficiaries of the Future Made in Australia Act; rising excesses for general insurers; plus impacts of grocery market inquiry.

-Companies benefiting from the Future Made in Australia Act
-A watching brief on rising excesses for general insurers
-Impacts of Senate Select Inquiry upon the grocery market

By Mark Woodruff

Companies benefiting from the Future Made in Australia Act

The Federal Government’s Future Made in Australia Act will look to leverage Australia's competitive strength in natural resources, explains Macquarie, and aim to accelerate momentum in advanced manufacturing and clean energy projects domestically. 

As part of the ongoing reworking of global supply chains, there will be a focus on greater sovereignty over Australia's resources and critical minerals. Domestic investment to build and fast-track new infrastructure will be incentivised, new technologies will be enabled, and training will be implemented for a clean energy workforce.

The Act will focus on building critical green industries, like green metals (e.g. rare earths mining and processing), green hydrogen, and advanced renewable manufacturing, such as battery and solar.

New initiatives will be launched and several existing initiatives will be consolidated under one umbrella.

One existing initiative is the $15bn National Reconstruction Fund which aims to support projects that create secure well-paid jobs, drive regional development, and invest in Australia’s national sovereign capability.

From these existing initiatives, Origin Energy ((ORG)) and Orica ((ORI)) are potential beneficiaries, notes Macquarie, via their joint investment in the Hunter Valley Hydrogen Hub with possible support from the $2bn Hydrogen Headstart project.

AGL Energy ((AGL)) is also vying for a share of the $1bn Solar Sunshot manufacturing program, explains the broker.

AGL and SunDrive (an Australian solar company) have recently partnered up to explore the possibility of establishing a solar manufacturing facility at the former Liddell coal plant’s site in New South Wales’ Hunter Region.

The Solar Sunshot program is attempting to build a pathway to the commercialisation of local solar photovoltaic innovation.

The analyst also expects the critical minerals resources sector will benefit from a $2bn expansion of the Critical Minerals Facility.

The challenge for Australia when considering domestic advanced manufacturing, explains Macquarie, is competing against the cheaper offshore alternative, particularly given higher capital and labour costs in Australia.

A watching brief on rising excesses for general insurers

Macquarie maintains a positive view on ASX-listed general insurers, but over the next year will be monitoring the extent to which customers raise their excesses to reduce the inflationary impact of insurance costs.

The gross written premium (GWP) measure for general insurers takes into account volume, price, sums insured and excesses, and any increase in excesses provides a natural headwind for GWP growth, explains the analyst.

A recent Macquarie survey of 13 general insurers in the Australian Home and Personal Motor insurance markets revealed Home excesses have increased by 10%, compared to 6.7% for Personal Motor, over the six months to December 2023, versus the previous corresponding period.

Regarding the Home market, new business excesses were increased more so than for renewal business, according to the survey. There was a 12.1% increase on average across the market (weighted by market share) to $1,034 for new business, while renewals averaged a 9.7% rise to $847.

Nearly all major insurers have increased the default excess for Personal Motor, according to the broker’s industry feedback, with one insurer noting the proportion of customers choosing a higher than default excess has doubled over two years.

For Personal Motor, excesses increased by 7.5% and 6.4%, respectively, to $907 for new business and $810 for renewals.

Macquarie has Outperform ratings for both Insurance Australia Group ((IAG)) and Suncorp Group ((SUN)).

Impacts of the Senate Select Inquiry into the Australian grocery market

The Australian grocery market is competitive but rational, and attractive industry fundamentals should continue to deliver appealing medium-term returns, suggests Jarden, after the final public hearing of the Senate Select Inquiry.

There was only limited suggestion of any benefit from a breakup of grocery chains, notes the broker.

Very few market participants are in favour of forced divestitures, agrees Morgan Stanley, which expects potentially more market power for suppliers via enforcements relating to the recent Independent Review of the Food and Grocery Code of Conduct. However, it’s felt supermarkets will remain dominant.

The focus of the Senate Inquiry was more around cost of living, profit and return on equity by comparison to offshore, and supply chain traceability, explains Jarden. Land-banking, supply agreements, Grocery Code inclusions, and purchasing practices were also covered.

The analysts at Jarden believe this Inquiry, combined with the upcoming ACCC Inquiry and the review of the Grocery Code, will result in greater overall transparency in the market. Likely outcomes, in the broker’s view, include regulation surrounding land-banking and supply-chain transparency.

Fresh news was scarce, according to the analysts, as debate focused on subjective definitions and profitability metrics, with general acknowledgement by companies that work is required to improve some practices.

Consistent with Jarden’s analysis, Woolworths Group ((WOW)) noted its market share has been broadly static in recent years, as the likes of Amazon, Chemist Warehouse and others in the space have expanded.

Morgan Stanley highlights Aldi now has 10-11% market share and is meaningfully price competitive with a 10-15% price gap versus peers.

Management at Woolworths also revealed inflation has moved to flat in recent weeks, suggesting to Jarden relatively muted ongoing like-for-like growth.

Woolworths, Coles Group ((COL)) and Endeavour Group ((EDV)) will report third quarter updates in coming weeks. 

The final report from the Senate Select Inquiry is due on May 7, with questions on notice to be responded to by April 24.

The Food and Grocery Code of Conduct review is due on June 30, while the ACCC interim report on pricing will commence due in August, with a final report due by February 2025.

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