Energy prices set for a massive increase again... but why?

Hi everyone,

Yesterday the Australian Energy Regulator (AER) announced it will allow energy retailers to lift prices for existing customers by 19.5-23.7 per cent. This is the cap that energy retailers can charge existing customers who haven’t looked elsewhere.

And it follows an 18 per cent increase last year. These are huge increases which feed directly into inflation, which then feeds into the Reserve Bank decision to lift interest rates.

With inflation currently around 7 per cent, the energy increase seems way out of whack. Why?

Global coal prices are down significantly from this time last year, as is gas and oil. So if the commodities which generate energy are down so much, then why aren’t our power prices following?

Australian Energy Market Operator explained at the end of April that average wholesale spot electricity prices fell 11 per cent to $83 per megawatt hour in the March quarter, following a 57 per cent decline in the December quarter.

So, commodity prices down and spot prices down… but household prices up. Just doesn’t make sense.

But then the AER said the cost of actually generating electricity accounts for around 30-40 per cent of the total market price. It said it’s the largest driver of increases in prices because “the wholesale electricity market has faced unprecedented supply challenges and volatility”.

In other words, the increase in prices isn’t from the cost of the energy but from how it’s generated. It’s the cost of the archaic infrastructure which generates the power.

It is the cost of years of neglect and lack of investment in modern power generation facilities.

And we’re paying for it through the hip pocket.

US debt negotiations coming down to the wire

June 1 is coming quickly and the US still hasn’t agreed to raise the $US31.4 trillion debt ceiling. Global financial markets are on tenterhooks.

Unlike a failure to reach a budget deal, which results in a government shutdown and the suspension of some Federal Government activity until a new spending deal is reached, breaching the debt ceiling would result in a default that would damage America’s credit rating and send shockwaves through the financial system.

The debt ceiling needs to be increased because the US needs to borrow more to pay the interest on its existing debt. If the world’s biggest economy, leader of the free world and home of capitalism defaults on an interest payment, the outcome would be devastating.

Treasury Secretary Janet Yellen says the US is "highly likely" to run out of sufficient cash by early June.

This week, the Treasury's total cash balance dipped below $60 billion. To put this in perspective, the US spends $1.3 billion PER DAY on interest expenses alone.

Previous debt limit negotiations in 2011, 2013, and 2021 have also gone down to the wire, but it remains to be seen how the two sides of politics will come together.

Democrats want a so-called “clean” debt ceiling increase without policy strings attached, Republicans want spending cuts and work requirements for certain federal welfare programs, and America’s creditors want to receive payments on debt and interest on time.

It could be a wild week ahead.

Property auctions starting to rise… does this mean supply is increasing?

As I’ve talked about a lot over the last couple of months, one of the big reasons for the rise in property prices is a lack of supply of new listings coming onto the market.

Many experts say the spring selling season will be a big test to see if the rise in interest rates forces more households to sell and scale down.

Current auction levels may be an early sign that supply is on the way up.

According to CoreLogic, auction activity increased 13 per cent last week, with 1,912 auctions held across the combined capitals. The previous week saw 1,692 homes auctioned, while this time last year the figure was 1,672. The combined capitals recorded a third week where the preliminary auction clearance rate held above 70 per cent.

Melbourne’s preliminary clearance rate held above 70 per cent for the sixth consecutive week, while Sydney auction listings were up 17.2 per cent from the previous week and 43.2 per cent up on the same time last year.

Home loan rate increases… by stealth

Competition in the home loan market has been intense. But it looks like the major banks are starting to give up being competitive and are increasing rates between RBA meetings.

CBA has increased the rate on its Wealth Package home loan by 0.1 per cent for new customers with big deposits.

This is the fourth time the bank has increased the rate on its Wealth Package loan for new customers in the last three months, in addition to the standard RBA hikes.

As a result, the lowest advertised variable rate for new customers taking out CBA’s Wealth Package has risen by 0.82 per cent since 1 March 2023, while existing customers have seen their rates rise by 0.5 per cent… 0.32 per cent extra for new customers.

Changes to CBA’s Wealth Package loan – new customers only
For owner-occupiers paying principal and interest

CBA is not the only bank increasing rates, NAB has also hiked its basic variable rate for new customers.

Changes to NAB’s Basic Variable Rate – new customers only
For owner-occupiers paying principal and interest

The big four banks collectively have now increased at least one advertised new customer rate on 13 occasions since 1 March 2023, although Westpac has only increased new customer rates once.

Variable rate hikes from the big four banks since 1 March 2023
Note: these hikes are in addition to RBA increases

Big four banks new lowest advertised rates

As you drive by your petrol station… this is what the rest of the world is paying

Petrol price per litre:

🇱🇧 Lebanon: $6.11
🇭🇰 Hong Kong: $2.96
🇸🇬 Singapore: $2.74
🇮🇸 Iceland: $2.39
🇩🇰 Denmark: $2.3
🇫🇷 France: $2.2
🇮🇹 Italy: $2.16
🇳🇱 Netherlands: $2.16
🇫🇮 Finland: $2.15
🇬🇷 Greece: $2.13
🇳🇴 Norway: $2.13
🇩🇪 Germany: $2.02
🇸🇪 Sweden: $2.01
🇧🇪 Belgium: $2
🇨🇭 Switzerland: $1.95
🇬🇧 UK: $1.83
🇦🇹 Austria: $1.82
🇪🇸 Spain: $1.82
🇵🇱 Poland: $1.63
🇹🇷 Turkey: $1.46
🇦🇺 Australia: $1.27
🇯🇵 Japan: $1.26
🇿🇦 South Africa: $1.25
🇰🇷 South Korea: $1.24
🇨🇦 Canada: $1.21
🇲🇽 Mexico: $1.21
🇮🇳 India: $1.18
🇧🇷 Brazil: $1.09
🇵🇰 Pakistan: $0.99
🇨🇳 China: $0.95
🇺🇸 USA: $0.95
🇦🇷 Argentina: $0.8
🇦🇪 UAE: $0.79
🇮🇩 Indonesia: $0.67
🇷🇺 Russia: $0.63
🇸🇦 Saudi Arabia: $0.62
🇳🇬 Nigeria: $0.57
🇮🇷 Iran: $0.36
🇪🇬 Egypt: $0.33
🇰🇼 Kuwait: $0.28
🇻🇪 Venezuela: $0.02

Australia dominates “new world” commodities

Australia dominates the commodities the world needs in the future. Dubbed “new world commodities”, they are the ones which will drive electric cars and renewable energy.

The likes of lithium, cobalt, rare earths and nickel are key commodities which will ride this wave. This chart from EY shows just how lucky we are in this country to dominate global reserves.

So not only do we dominate old world commodities like iron ore and coal, we’re also big in new age resources which will drive the next generation of exports.

Truck movements show US heading for recession

I know it’s a bit quirky, but a lot of US market analysts believe a leading indicator to the health of the economy is an index which measures the movement of heavy trucks. The rationale is that if truck movements slow then demand for goods has dropped off and consumers and business are going into the bunker.

The ripple effect is that if the economy slows, profits shrink and share prices fall.

This graph from SentimenTrader tracks the Heavy Truck Index and the S&P500 share index in the US. It shows how the truck index has fallen sharply recently and that history says the sharemarket should follow pretty soon.

Stock of the Week: Mineral Resources

Sell! OMG.

On my sharemarket show The Call (www.ausbiz.com.au) this week a viewer asked the expert panel for a recommendation on resources darling Mineral Resources.

Min Res is a much-loved stock on the market with investors having a huge positive opinion on its billionaire founder and CEO Chris Ellison. The company is a major iron ore and lithium producer and exporter, and also has a successful mining services business.

Over the last 12 months its share price has ranged from $42.75 to $96.90… it’s currently trading around the $72 level.

Mineral Resources comes up regularly on The Call and generally receives a favourable recommendation from the panel… but not with Carl Capolingua from ThinkMarkets and Scott Phillips from The Motley Fool.

Both recommended a sell on the stock and both recognised it was a controversial call.

Carl said the Min Res share price chart wasn’t good and was indicating further weakness.

Then both Carl and Scott pointed out the future price of its two biggest commodities, iron ore and lithium, was too risky to call at the moment and both are likely to fall in price.