Record company profits and petrol prices

Business Indicators; Energy market update

The Australian Bureau of Statistics (ABS) said company operating profits rose by 4 per cent in the September quarter to be up 5.4 per cent on a year earlier. Profits hit a record high $463.1 billion over the year to September.

Wages & salaries (includes changes in wages and employment) fell by 0.8 per cent in the quarter to be up 4.7 per cent on the year – still above the decade average annual growth rate of 3.3 per cent.

Inventories fell by 1.9 per cent in the September quarter to be up 0.7 per cent on the year. Commonwealth Bank (CBA) Group economists expect inventories to subtract 0.7 percentage points from economic growth or GDP.

The Australian Institute of Petroleum reported the national average unleaded petrol price rose by 4.2 cents last week to a record high 170.4 cents a litre. Petrol prices hit record highs in Brisbane, Hobart and Melbourne.

What does it mean?

• There is still quite a large number of partial indicators (or inputs) to be issued ahead of Wednesday’s economic growth statistics for the September quarter. On top of today’s data on profits and inventories, there is the balance of payments data on Tuesday together with the government financial statements.

• At this stage Commonwealth Bank (CBA) Group economists are tipping Aussie gross domestic product (GDP) to drop by 3.5 per cent in the September quarter – potentially the second biggest quarterly fall since the Bureau of Statistics (ABS) records began in 1959.

• Today’s ABS data confirms that corporate profits lifted by 4 per cent in the September quarter, supported by government subsidies during prolonged Delta virus lockdowns in Australia’s south-east. In fact, business profits hit a record high $463.1 billion over the year to September.

• The profit figures include revenue and costs, as well as subsidies (transfer payments) from governments. During the quarter it is estimated that governments almost made a combined $10 billion worth of emergency Covid-19 payments to businesses to help them survive a decline in turnover during shutdowns.

• That said, just six of the 15 industries saw profits expand in the September quarter, led by Construction (up 19.7 per cent), Professional, scientific and technical services (up 17.2 per cent) and manufacturing (up 10.3 per cent). And on top of the fiscal support, commodity prices lifted during the quarter, boosting the profits of miners (up 5.7 per cent).

• But profits fell sharply for the hard-hit Administrative and support services (down 25.3 per cent), Transport, postal and warehousing (down 12.7 per cent) and Accommodation and food services (down 12.5 per cent) industries.

• One of the other key releases today saw business inventories fall by 1.9 per cent in the September quarter, which will likely detract 0.7 percentage points from economic growth or GDP when released on Wednesday. Wholesale trade businesses drew down most on their inventories, falling 4.4 per cent in the quarter, due to the Delta supply-shock.

• And wages and salaries dropped 0.8 per cent in the September quarter – the first decline since the national lockdown in the June quarter, 2020 – with government social distancing measures weighing on payrolls in the Accommodation and food services (down 23.5 per cent) and Arts and recreation (down 22.9 per cent) industries. But the annual wages bill of 4.7 per cent at the end of September was still above the decade average annual growth rate of 3.3 per cent and is 4.1 per cent above pre-pandemic levels.

• Global oil prices plunged around US$10 a barrel on Friday, their largest one-day drop since April 2020, as a new coronavirus strain, Omicron, sparked fears that renewed lockdowns will threaten a global recovery in crude demand. The Brent crude price slid US$9.50 or 11.6 per cent – the seventh largest ever decline – to US$72.72 a barrel. And the US Nymex crude price dropped US$10.24 or 13.1 per cent to US$68.15 a barrel.

• The move lower in oil prices was excerbated by low trading volumes and thin liquidity following Thursday’s US Thanksgiving Day holiday. Wall Street traders aggressively sold oil futures contracts to protect their portfolios against positions in the options market. Goldman Sachs oil analyst Damien Courvalin called the drop in prices an “excessive repricing.”

• It was a tumultous end to the week for global oil markets with US crude prices down for a fifth successive week. Elevated retail gasoline prices prompted US President Joe Biden on Tuesday to announce the release of 50 million barrels of crude from the Strategic Petroleum Reserve (SPR) in a co-ordinated effort with China, Japan, South Korea and the UK to tap inventories to boost supply.

• In Asian trade today, global oil futures prices are up by around 5 per cent as traders weighed the possible impact of the Omicron virus strain on the global economic reopening. Of course, the big event for oil markets this week is the OPEC+ two-day monthly meeting starting on Wednesday. Worries about crude demand could mean that the producer alliance suspends its scheduled 400,000 barrels per day increase in production for January. According to Bloomberg reports, the group was already considering a pause after the US and other consumers announced the release of emergency crude stockpiles last week.

• Last week’s fall in global oil prices could offer some welcome respite to beleagued Aussie motorists heading off on road trips as school and university holidays kick-off in the coming weeks. Australia is a net importer of refined petroleum product and the benchmark Singapore gasoline price dipped by almost 5 per cent in Aussie dollar terms last week – the most 14 weeks.

• According to the Australian Institute of Petroleum, the national average weekly retail unleaded petrol price hit a record high of 170.4 cents a litre (c/l) last week. Pump prices also hit all-time highs in Hobart (179.5c/l), Brisbane (185.5c/l) and Melbourne (179.1c/l). While prices have peaked in both Melbourne and Brisbane, Sydney motorists should fill-up now with another price hike underway. Already prices are near 191.9 cents a litre today in Sydney’s Inner West, according to real-time fuel app Motormouth.

What do you need to know?

Business Indicators – September quarter

• Company operating profits rose by 4 per cent in the September quarter to be up 5.4 per cent on the year.

• Company profits rose in six of the 15 industry groups in the September quarter. Profits rose by the most for Construction (up 19.7 per cent), followed by Professional, scientific and technical services (up 17.2 per cent) and Manufacturing (up 10.3 per cent).

• But profits fell by the most for Administrative and support services (down 25.3 per cent), Financial and insurance services (down 14.1 per cent), Transport, postal and warehousing (down 12.7 per cent) and the Accommodation and food services (down 12.5 per cent) industries.

• Over the year to September, business profits surged by 213.4 per cent for Financial and insurance services, followed by Mining (up 67.5 per cent). But profits fell by the most for Accommodation and food services (down 70.5 per cent), Other services (down 56.8 per cent) and Arts and recreation services (down 55.3 per cent).

• Inventories fell by 1.9 per cent in the September quarter to be up 0.7 per cent on the year. Inventories fell most for Wholesale trade (down 4.4 per cent), followed by Manufacturing (down 1.3 per cent) and Mining (down 0.5 per cent). Over the year to September, inventories for Mining (down 7.7 per cent) are down by the most. Inventories will detract around 0.7 percentage points from GDP growth.

• Sales volumes fell by 3.5 per cent in the September quarter to be up 3.3 per cent on the year. And nominal sales eased by 1.2 per cent in the quarter to be up 12.7 per cent over the year.

• Wages & salaries (includes changes in wages and employment) fell by 0.8 per cent in the September quarter to be up 4.7 per cent on the year.

Weekly energy market update

• Last week, the Brent crude oil price fell by US$6.17 or 7.8 per cent to US$72.72 a barrel and the Nymex crude oil price dipped by US$7.95 or 10.4 per cent to US$68.15 a barrel, its fifth straight weekly decline.

• The benchmark Singapore gasoline price dipped US$6.08 or 6.5 per cent – the most in 14 weeks – to US$87.90 a barrel last week. In Aussie dollar terms, the Singapore gasoline price fell by $6.13 or 4.7 per cent – also the biggest drop in 3½ months – to $123.07 a barrel or 77.41 cents a litre.

• According to the Australian Institute of Petroleum the national average unleaded pump price rose by 4.2 cents last week to a record high 170.4 cents a litre. Weekly petrol prices hit record highs in Hobart (179.5 cents a litre, c/l), Brisbane (185.5c/l) and Melbourne (179.1 c/l). The smoothed gross retail margin rose from a 2-year low of 11.7 cents a litre to 13.1 cents a litre last week.

• The national average wholesale (TGP) petrol price fell by 3.3 cents last week to 149.3 cents per litre. Today the TGP price sits at 147.9 cents per litre, down by 2.9 cents from 150.8 cents a litre in the previous week.

• MotorMouth records the following average retail prices for unleaded fuel today: Sydney 165.7c/l; Melbourne 173.0c/l; Brisbane 183.7c/l; Adelaide 169.9c/l; Perth 152.8c/l; Hobart 179.8c/l; Darwin 169.3c/l and Canberra 170.7c/l.

Published by Ryan Felsman, Senior Economist, CommSec