In Brief: Telcos, Wages, Tariffs & Aluminium

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Weekly Broker Wrap: challenger telcos are winning, next week's minimum award wage decision; US tariffs; tight bauxite and alumina markets.

-Telco challengers chipping away at incumbents
-Impact of next week’s minimum award wage decision 
-Import tariffs are back in the USA
-Beneficiaries of tight bauxite and alumina markets

By Mark Woodruff 

Telco challengers chipping away at incumbents

Over the last year, Aussie Broadband ((ABB)) and Superloop ((SLC)) have been growing ahead of the overall fibre-to-the-premise (FTTP) market, and Wilsons expects this trend to continue at the expense of incumbents as the NBN roll-out program continues.

The overall challenger market increased its quarter-on-quarter market share by 80 basis points to 17.5%, according to the National Broadband Network’s Wholesale Market Indicators data for March, as the likes of Telstra Group ((TLS)), Optus, TPG Telecom ((TPG)) and Vocus continue to lose share, notes the broker.

The incumbents have been slow to capitalise on the rollout program due to their legacy IT and Network stacks, according to the analysts, which makes the process of upgrading a consumer’s technology offering more cumbersome.

Also, their customers are weighted to lower speed plans (50mbps plans), and Wilsons suggests consumers looking to upgrade are evaluating the challengers who offer the same services but at a lower price.

For the March quarter, the total number of NBN services (excluding satellite) increased by 0.3% quarter-on-quarter, with numbers for Aussie Broadband and Superloop lifting by 4% and 8.4%, respectively.

The challengers are winning customers organically and acquiring other challenger telcos and/or their respective customer base, explains Wilsons. They are also bringing services onto their own network instead of wholesaling services from another provider.

Over the coming quarters, Aussie Broadband could experience a headwind (and Superloop, a tailwind) as its 133,000 Origin Energy ((ORG)) customers convert to Superloop’s network, points out the broker.

Both companies are rated Overweight by Wilsons.

Impact of next week’s minimum award wage decision 

The importance of next Monday’s FY24 minimum award wage decision should not be understated, suggests Morgan Stanley, given the Reserve Bank of Australia directly referred to last year’s minimum wage increase as a factor contributing to the interest rate hike in June 2023.

The upcoming decision will not only set the increase for both the national minimum wage, but also the award wage increase, explains the broker, impacting around 1% and 25% of workers, respectively.

The analysts anticipate an increase of 4%, broadly in line with both current aggregate wages growth and underlying inflation. An increase at or below inflation would be a dovish surprise, in the broker’s opinion, while a meaningfully higher increase (say 4.5%) would be more hawkish.

As per Morgan Stanley, next week's increase will likely contribute to some persistence in wage expectations of around 4%, which is also where new Enterprise Bargain Agreements are being set.

Comparing current US tariffs to those of 2018

Upcoming tariffs imposed by the Biden administration on Chinese electric vehicles and solar panels have prompted market conversations around risks to inflation, but Morgan Stanley believes potentially large real economy effects should also be weighed.

The 2018 decision to impose tariffs on around US$350bn worth of imported goods from China ultimately boosted inflation, notes the broker, but the overall effect on core consumer goods prices proved to be smaller because a large portion of the goods under tariff were intermediate goods rather than final consumer goods. 

Consequently, some of the higher costs were absorbed in compressed margins or reduction in use in domestic production for such items as washing machines, solar panels, steel and aluminium. Also, an appreciation in the US dollar offset part of the price rises.

For industries with high exposure to tariffs, manufacturing employment falls in the first year of the tariffs being implemented, according to research by the Federal Reserve, based on the 2018 tariffs, while rising input costs and retaliatory tariffs more than offset the positive effect from import protection.

However, current tariffs differ greatly from 2018, notes Morgan Stanley, as the US imports virtually no electric vehicles and only few solar panels and batteries, so direct economic impacts should be limited. Anticipation of these tariffs by markets and supply chains, along with fiscal support from measures like the Inflation Reduction Act, are also expected to mitigate risks.

There is potential for broader or larger tariffs after the US election, but the economic impact will depend on the details.

Beneficiaries of tight bauxite and alumina markets

In future, the market may need to pay more attention to alumina and bauxite than it has done in the past, suggests Morgan Stanley, as the impact of rising imports by China for both commodities are starting to be felt in the global market.

Bauxite is the key upstream raw material for alumina production, which is a key component for aluminum production. Hence, bauxite supply impacts global aluminum supply stability.

China is importing more bauxite and alumina because domestic bauxite supplies have been disrupted since mid-2023, and alumina production has been impacted due to lack of bauxite. Supply is down -20% year-on-year due to environmental issues, mine safety controls and grade decline issues, explains the broker.

China's domestic bauxite inventory has also been declining on lower production and solid demand from alumina refiners. Currently China imports 70% of its bauxite needs largely from Guinea and Australia which supply 74% and 22% of total imports, respectively. 

China's reliance on Guinea means any supply disruption from Guinea would cause material impact to China's bauxite and alumina supply and could disrupt operations for the companies reliant on imports, explains Morgan Stanley.

Rio Tinto’s ((RIO)) recent force majeure on alumina supply from its refineries in Queensland also highlights overall market fragility. Depending on the duration of this restriction, the small market surplus Morgan Stanley had forecast could be wiped out.

For global alumina supply, disruptions continue to rise due to issues such as wars and difficulty to source bauxite or gas, with around 10% of global ex-China supply disrupted and constraining the global alumina market further, given China's need to import more. 

These factors combined will lead to tighter alumina supply in China and globally, and higher prices for longer, the broker predicts.

Morgan Stanley says alumina prices could overshoot the broker’s FY24 estimate of US$360/t average and sees upside risks to the forward-looking forecasts as well.

Already the implied bauxite price of material imported from Guinea into China has risen close to US$70/t, while alumina pricing has been rising recently too, observes the broker.

On the ASX, Overweight-rated Rio Tinto and South ((S32)), along with Equal-weight-rated Alumina Ltd ((AWC)), should benefit from any upside to bauxite and alumina prices.

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