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In Brief: Budget 2024/25, Iron Ore & Milk

Weekly Reports | May 17 2024

This story features ILUKA RESOURCES LIMITED, and other companies. For more info SHARE ANALYSIS: ILU

Weekly Broker Wrap: impact of the 2024/25 Budget on critical minerals, listed property and healthcare; iron ore pricing; and dairy fundamentals & pricing.

-Budget 2024/25 impact on critical minerals, property & healthcare
-China’s declining importance for iron ore prices
-Global dairy fundamentals, rising Australian production

By Mark Woodruff

The 2024/25 Budget: impacts on critical minerals

The Critical Minerals Production Tax Incentive stands out as a potentially the most significant item in the 2024/25 Budget for the Resources sector, suggests UBS, but the broker adds there is a need for more detailed guidance to fully understand which parts of the value chain across different commodities will be eligible for a credit.

Focusing on ‘processing and refining’, this initiative aims to incentivise investment in further downstream value-added processing to export higher value critical minerals products, explains Wilsons. This compares to critical minerals exports today which largely comprise lower-value intermediate products.

Eligible recipients can obtain a refundable tax offset of -10% of processing for the 31 critical minerals (including nickel, graphite and lithium) currently listed in Australia. The credit will be available for a maximum of 10 years between July 1, 2027 and June 30, 2040.

UBS indentifies Iluka Resources ((ILU)) as potentially the most positively impacted by these incentives. The company owns Australia's first fully-integrated rare earths refinery at Eneabba, in Western Australia.

Iluka is set to become a global material supplier of separated rare earth oxide (REOs), and processing costs are now expected to fall.

Another potential beneficiary, according to Morgan Stanley is IGO Ltd ((IGO)) via its 49%-owned Kwinana lithium refinery, which may now also achieve lower hydroxide processing costs.

The impact on Lynas Rare Earths ((LYC)) and the slew of local lithium producers is open to interpretation, suggests UBS.

This broker questions why copper was not included in the 31 minerals eligible for the production credit given the commodity's continued importance (and scarcity) in a decarbonised world.

The 2024/25 Budget: impacts on listed property

While the cash rate will be the key driver of any improvement in residential sales activity in the near term, Macquarie believes the 2024/25 Budget housing package, and measures to increase the number of construction workers, should help reduce development time frames over the medium-term, providing a tailwind for residential developers Mirvac Group ((MGR)) and Qualitas ((QAL)).

The requirement for universities to build more student accommodation will also benefit Dexus ((DXS)) and GPT Group ((GPT)), who have recently established a presence in the space, highlights the broker.

Macquarie analysts see a further tailwind for GPT Group, and fellow retail landlords who are more exposed to discretionary categories, such as Scentre Group ((SCG)) and Vicinity Centres ((VCX)), as Macquarie anticipates a 1.5% impact on disposable income from the budget.

Better transport for Western Sydney, courtesy of an additional $2bn of infrastructure funding (including $1.9bn for priority road and rail projects), will be a positive for medium-term completions and tenant demand longer-term. REITS with exposure here are GPT Group, Mirvac Group, Charter Hall ((CHC)) and Goodman Group ((GMG)), points out the broker.

For the REIT sector overall, Macquarie’s key picks are the Outperform-rated Charter Hall, Mirvac Group, and Goodman Group.

The 2024/25 Budget: impacts on Healthcare

Jarden has examined changes in funding from the 2024/25 Budget across the numerous healthcare items that are expected to have a bearing on ASX-listed stocks within the Healthcare and Aged Care sectors.

The highly anticipated indexation for pathology did not live up to expectations, suggests the broker, while diagnostic imaging appears to have been looked after further with additional codes, indexation and increasing access to unlicensed magnetic resonance imaging (MRI).

On the other hand, Citi sees an incremental negative for diagnostic imaging companies in the removal of the licensing requirement for MRI machines, though notes the ultimate impact will depend on the level of service utilisation, actual versus budgeted savings, and fee indexation compared to wage inflation.

Within the diagnostic space, the diagnostic imaging segment remains Jarden’s favourite. While various budget initiatives are positive, they favour those providers offering higher imaging modalities, such as Neutral-rated Sonic Healthcare ((SHL)) and Integral Diagnostics ((IDX)), note the analysts. Citi also covers Sell-rated Healius, as well as Integral Diagnostics and Sonic Healthcare which both have Neutral ratings.

Jarden also covers Healius (Underweight) under the diagnostic imaging banner, along with Neutral-rated Capitol Health ((CAJ) and Buy-rated Telix Pharmaceuticals ((TLX)).

While Telix is a small beneficiary of additional funding for the nuclear medicine procedure -positron emission tomography (PET)- and greater nuclear imaging funding, Jarden notes Australia is not a meaningful contributor to the company’s revenues.

Healius and Sonic Healthcare fall under both brokers’ coverage of pathology companies. In addition, Citi covers Australian Clinical Labs ((ACL)) which is currently rated Buy.

Aged care also benefitted, with a further $65.6m of funding over four years from 2024-25 to attract and retain aged care workers, which will provide a further boost for Regis Healthcare ((REG)) – Overweight; target $3.64- in Jarden’s opinion, on top of the government's investment to fund award wage increases last year.

The government is also committing a further $10.8m over two years from 2024-25 to continue to upskill the aged care and primary care workforce to embed palliative care capacity.

While the Budget has dedicated $531.4m in 2024-25 to release 24,100 additional home care packages, the broker believes this measure will have the effect of delaying the entry of elderly into aged care homes, which is incrementally negative for Regis Healthcare.

The commitment to strengthen Australia's mental health and suicide prevention system is praiseworthy, but Jarden notes it will have a largely immaterial impact on Ramsay Health Care ((RHC) which is currently assigned a Neutral rating and $63.43 target.

The government will also provide around $304m over two years from 2024-25 to ensure to improve pandemic preparedness and ensure the National Medical Stockpile can continue to respond to health emergencies.

This includes the stockpiling of various vaccines, notes Jarden, which has the effect of ensuring the government revenue stream for Overweight-rated CSL ((CSL)) is likely to be ongoing.

China’s declining importance for iron ore pricing

The impact on the price of iron ore from demand outside of China is becoming a greater focus for Morgan Stanley. While China remains easily the largest market in absolute terms, it’s felt the country’s global share has peaked.

Growing demand in India, other Asian countries, and the Middle East is now offsetting China’s falling consumption of iron ore for its own steel use since 2022, explains the broker.

Since that time, iron ore has averaged around US$120/t annually, well above where consensus estimated it would be.

Based on where steel (as a proxy for iron ore) is first embedded into an application (e.g. buildings, vehicles, machinery), after accounting for direct trade in steel products, China's share peaked in 2020, and has declined further as its property sector has slowed, explains Morgan Stanley.

Another measure is to look at where steel ultimately finds economic utility. Here, China's share appears even lower, given it is also a large exporter of steel containing goods (i.e. indirect trade) such as machinery and cars.

Given this consequential growth in ex-China demand is encountering a supply base that is relatively flat, Morgan Stanley remains constructive on the iron ore price.

The broker’s third and fourth quarter 2024 forecasts for the iron ore price are US$120/t and US$125/t, respectively.

Increasing Australian milk production, and “somewhat” positive pricing

Subdued growth in global milk supply is poised to bolster an ongoing recovery for the dairy market, leading to better milk prices for dairy producers in most regions worldwide. In Australia, dairy farmers are generally on a strong footing as the 2024/25 season approaches.

Despite constrained supply, the global dairy market may experience a slower price recovery than previously anticipated, particularly as China has less need for dairy imports. These are among the conclusions drawn by Rabobank in recently released sector research.

Earlier expectations of gradual price increases throughout 2024 have been tempered due to weaker global demand and increased domestic milk production in China, which has led to a reduction in imports, according to Rabobank’s Q2 Global Dairy Quarterly, titled Searching for Equilibrium.

The report explains the late-2023 and early-2024 initial milk price surge was largely due to a period of importers’ restocking at lower prices, rather than a robust uptick in consumer demand.

Chinese dairy consumption remains subdued on the back of a weak job market and low consumer confidence, yet Radobank’s 2024 growth forecast for milk output in China has now increased to 3.2% from 2%, reflecting higher-than-anticipated output due to the lagging effect from the last round of dairy expansions during 2019-2022.

Another factor to watch from both a supply and consumer demand perspective, according to the bank, is the highly pathogenic avian flu which is infecting cows in eight different US states. There has been no measurable reduction in milk supply so far.

For Australia, Radobank forecasts milk production will finish the 2023/24 season 2.9% higher at 8.23bn litres, and predicts a further 1% increase for the 2024/25 season.

Local milk pricing is set to be “somewhat positive” for the new season, Rabobank says, given a well-performing domestic market and healthy competition among dairy companies.

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CHARTS

ACL CHC CSL DXS GMG GPT IDX IGO ILU LYC MGR QAL REG SCG SHL TLX VCX

For more info SHARE ANALYSIS: ACL - AUSTRALIAN CLINICAL LABS LIMITED

For more info SHARE ANALYSIS: CHC - CHARTER HALL GROUP

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For more info SHARE ANALYSIS: DXS - DEXUS

For more info SHARE ANALYSIS: GMG - GOODMAN GROUP

For more info SHARE ANALYSIS: GPT - GPT GROUP

For more info SHARE ANALYSIS: IDX - INTEGRAL DIAGNOSTICS LIMITED

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For more info SHARE ANALYSIS: ILU - ILUKA RESOURCES LIMITED

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For more info SHARE ANALYSIS: MGR - MIRVAC GROUP

For more info SHARE ANALYSIS: QAL - QUALITAS LIMITED

For more info SHARE ANALYSIS: REG - REGIS HEALTHCARE LIMITED

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For more info SHARE ANALYSIS: TLX - TELIX PHARMACEUTICALS LIMITED

For more info SHARE ANALYSIS: VCX - VICINITY CENTRES