Aussie earnings threatened by wage demands, rates rises

It's risk on for strikes and cushions with lenders may be pressured, says Moody's.

Moody's Investors Service says that rising costs are exerting downward pressure on the margins of Australian corporates, but in most cases the situation is manageable within current ratings.

In a release, the ratings agency said: "We expect that most Australian issuers will be able to manage these cost pressures within their respective rating categories. However, rising costs are likely to reduce the available cushions of some issuers within current ratings, and especially if accompanied by weak earnings and aggressive capital strategies," says Ian Lewis, a Moody's vice president and senior credit officer.

"For major industrial manufacturers, the ability to control costs will become ever more important as prices for major raw materials continue to rise," adds Lewis.

Lewis was speaking at the release of a new Moody's report that he wrote about the impact of rising costs on Australian corporates.

In Australia, the potential for rising tension in worker-management relations could emerge in the latter half of 2011 and into 2012 as wage negotiations reach their peak period.

"Australian companies in the transport and extractive industries have the most exposure to escalating wages and prices in the second half of 2011 and 2012," says Lewis.

"Major mining and energy companies are taking advantage of buoyant conditions to plan massive expansion projects. At the same time, the demand for highly skilled labor to undertake these future endeavors and to run existing ones at optimum levels has never been more acute," says Lewis.

In addition, large consumers of oil and oil derivatives, such as airlines, will suffer most from rapidly compressed margins as their ability to pass on increases in fuel costs becomes constrained, the report says. With diminishing protection afforded by hedging of fuel prices, major rated airlines such as Qantas face rising pressures, notwithstanding the strength of the Australian currency.

Increasing raw-material prices will further hurt companies that are unable to fully pass on cost increases and those with narrow profit margins, such as major food retailers.

However, the report notes that, despite rising interest rates in Australia and resulting higher costs in servicing debt, corporate balance sheets are still strong overall. Moody's also expects that, through 2011 and 2012, foreign-bond issuance will remain healthy.