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Live. G'day, welcome to inside

business. The resources boom

was supposed to be Australia's

policy against the financial

storms lashing the Europe and

the US. Now the commodity

markets have suffered one of

their biggest monthly falls on

record are we really all that

well insure snd is it a

correction or the start of a

correction or the start of a

capitulation. We'll talk to

Daniel Heinz about this most

crucial correction. We'll catch

up with Connect eft's Tony

Shepherd who this week defied

the odds and a significant

group of shareholders to sell

the toll road operator into

private hands. And we'll look

at the phenomenon of the rogue

trader. Can anything be done to

stop the carnage they inflict

on the big banks?

And in First Person, weaving

in and out of trouble, the

carpet maker battling to

maintain a foothold in a maintain a foothold in a tough

manufacturing environment. So

we've been able to not so much

compete on price but compete on

other styles of our business -

quality and our ability to

deliver the carpet. It's been

an ugly month for the big

market traded comod tis. Copper

tumbled about 25%, nickel and

zinc are down 16% and even gold

than has taken a hit slightly more

than 20%. So far the big bulk

comod kis iron ore and coal

have held up reasonably well

but with steel production in

China softening that resilience

may not last. I spoke to Citi's

director of commodity research

Daniel Hynes about what's

behind the sell off. You and your team commented this week

that the commodities bull run

is on hold. Is it in fact a

bear run now? I think it's bear run now? I think it's got

the potential at the moment.

What we've seen obviously this

year has been a couple of

severe sell offs. Earlier in

the year around May we saw more

a technical and position-driven

sort of sell off but this time

it does seem to be more

fundamentally driven by downgrades in economic

forecasts like we have done

here at Citi. So I think people here at Citi. So I think people

are obviously positioning for

weaker growth and as a

consequence are starting to

sell their long positions that

they had for a lot of this

year. But for the moment we

haven't really seen a lot of

investors take a bearish, a

particularly bearish sort of

position just yet but I think

once things settle down if they

do believe that economic growth

lower then is going to be significantly

lower then that will start to

flow through into the commodity

space as well. Is it fair to

say that the bull market in

commodities that has occurred

post 2008 was largely due to speculation and investor

demand? Look, I think that was

a big component of it. We

certainly saw prices fall very

severely and that was not just

speculative interest falling

away but we also saw consumer away but we also saw consumer

demand, for example, weaken

significantly. This time

obviously the bull run, I

think, was exacerbated by

investor demand and may have

overshot where the fundamentals

have suggested. So in a way

this is has sort of been a good

clean out although we think now

it's getting to levels where

they may, you know, in some

commodities actually be lower

than where those fundamentals

suggest. Let's just talk about

the fundamentals a bit. If

there's a European recession or

indeed just a big slow down,

how much of an impact will that

have on the commodities market

if China keeps growing at 8%

plus? It's certainly different

according to which commodity

you look at. The industrial

metals, they're a lot more

exposed to the developed

economies like Europe and the

US than say the

US than say the bulk

commodities or even energy. So,

you know, it can differ

greatly. I think for us in a

particular in Australia iron

ore and coal are very heavily

exposed to emerging markets

between 50% and 75% of demand

coming from those markets. So

we would actually see that hold

up relatively well if China did

grow at plus 8%. The metals, I grow at plus 8%. The metals, I think, you know, would

certainly suffer under a weaker

sort of European and US outlook

and so we have, as a

consequence, you know, relatively bearish sort of view on those in the shorter

term. Copper has fallen quite a lot lately, what's behind

that? Copper had a great run

this year reaching record highs

of nearly $10,000 a tonne and

for us that was for us that was one actual commodity which pushed beyond

where we saw the fundamentals

and I think the sell off at the

moment has certainly taken a

lot of that out. But in saying

that, you know, it's still

above where we see the support

levels. Where do you see the

support level? At the moment we

think it's around about $6,400

a tonne and that's where a tonne and that's where the

marginal cost producer sits.

That would take about 300,000

tonnes out of the copper market

and as a consequence that

correlates to roughly Chinese

GDP of about 6%. So obviously

that would be quite a bearish

scenario if it did happen but

below that we think that the

Chinese would be active buyers

of copper on market because of copper on market because

then it becomes cheaper to buy

copper rather than build

projects or buy assets. So

where's the copper price now

and what sort of fall would

that represent? It's trading

now at around about $7,100 a

tonne. We have a short-term

target of $7,000 a tonne so not

far from that now. Which

commodity do you think ordinary

investors should watch most

closely - copper, gold or oil? Look, I

oil? Look, I think copper is

the bellwether of the general

macro economic environment out

there and it's certainly, I

think, from an investor side

closely watched. So if you want

to get a sense of where

investors are thinking and

feeling in terms of the

commodity market, copper is

always a good one, particularly

in terms of industrial production, industrial production, industrial demand.

So I'd certainly watch that

one. Look, oil and energy, you

know, can differ. Obviously

dependent on not just

industrial demand but the

population growth and the like

and it has supply side issues

at the moment as well which is

keeping it tight. So I think

copper certainly will reflect,

I suppose, the immediate outlook in the economic environment. You mentioned environment. You mentioned the

outlook for bulk commodities,

that's iron ore and coal,

depends to a large extent on

the outlook for emerging

markets. So what do you think

is going to happen in China now

and therefore what's your

outlook for iron ore and

coal? For iron ore we expect it

still to be relatively robust

although we've had fairly

strong steel production in

China this year, well beyond people's expectations. And that's starting to that's starting to roll over

now so we would expect a little

bit of softness in the steel

market thus iron ore and

metallurgical coal will

probably suffer under that

environment but those markets

are still extremely tight.

Metallurgical coal obviously

suffered a lot from the supply

- on the supply side from the floods in Queensland earlier

this year. So that market's

still very tight. Iron ore

structurally has been a tight market for market for some time and we

don't see that changing for the

next 12 months. So I think

those markets should hold up

relatively well but certainly

in the face of falling

sentiment in terms of Chinese

growth and then prices are

likely to be a little bit soft. Thanks very much,

Daniel. My plesh - pleasure. If

the world of finance wasn't

worrying enough already in the

middle of a hay mayhem up polls

polls a rogue trader who

kneecaps UBS to the tune of

$2.2 billion and adds another

layer of uncertainty on the

Europe's tottering financial

houses. So how can things get

so out of hand and are the

banks doing enough to manage

the risk? Neal Woolrich

reports. It's the walk of

shame for a select few who have

blown billions of dollars and brought brought financial giants to

their knees. London-based Kweku

Adoboli is the latest to join

the rogue traders' hall of

infamy accused of losing $2.2

billion while working on UBS's

exchange traded funds desk. For

large items such as this a $2

billion loss yes, that is

preventable. It's up to the individual organisation and individual organisation and the

buck stops with board and with

management. There is basically

the government's failure, the

failure of the risk management

practices within an

organisation and importantly it

is also to do with the

incentives that are offered to

the trader, especially the

bonuses. Personally I think we

have a situation where we give

some young people who are

highly motivated control over a highly motivated control over a large amount of money and say

to them go and make money for

us and the more you make the

more we will reward you and

that provides incentives where

some people may fall into the

trap of doing unauthorised activities. While Kweku Adoboli

is accused of racking up on

eye-popping losses he's still

far from the world's worst

rogue trader. That dubious distinction rests distinction rests with

Frenchman Jerome Kerviel who

was arrested last year while

working at Societe Generale. By

contrast the man who broke the

century's old Barings's Bank

Nick Leeson lost millions in

the early '90s. We need to go

back to the old days of at back to the old days of at least manually cross checking

some of these things and this

came out very distinctly in the

Societe Generale scandal in

France that manual checking was

almost absent. It seems to me

to say that the instruments are

complex and that the current

work force is perhaps not - or

too specialised, is really too specialised, is really a

cop out. Australia's own rogue

trading scandal was modest by

comparison. In 2004 four

foreign currency dealers lost

the National Australia Bank

$360 million.

That assessment was as

misguided as the group's

trading strategies and all 4 of

the NAB's rogue traders were

eventually sentenced to jail

terms. It also cost the NAB's

chairman and CEO their jobs and

led to a bitter board spill.

While it inflict ed

long-lasting shairp damage it

never came close to breaking the

the bank. In the context of

overall returns for

shareholders or depositor

safety it's not a big issue.

The bigger issue is one of reputation for the bank that if

they're seen not to have good

controls then one starts to ask

the questions about what

exactly is happening in terms

of their various trading

strategies and investment

strategies. And it's not just

banks that are vulnerable. Back

in 1986

in 1986 Andrew Koval was blamed

for bringing down AWA after the

foreign exchange gains he

apparently made turned out to

be $50 million in losses. The

foreign exchange is the sort of

game if you like that if you're

away from it and not keeping an

eye on it it can be

suicidal. It's not systems and

processes that go rogue or go bad,

bad, it's people. Bruce Auty is

a former chief risk officer for

the Bank of Queensland and is

now a principal with the

consulting firm the Risk Board.

He says a common theme in UBS,

Barings and Societe Generale scandals was each individual

had moved from the back office

to a trading position. They

knew what the processes,

controls and the weaknesses in

those controls were. So it was those controls were. So it was

a failure of management to put

in place really appropriate

controls and a failure of risk

management in an overall

sense. One sort of wonders to

what extent the big events are

the tip of an iceberg or

whether it really is there's

not much happening except these

occasional ones where someone happens to have found a way

around the systems. That may

make nervous investors and

depositors even more skittish but but Professor Kevin Davis says

the best an institution can do

is put in place systems which

flag problems

quicklike. There's probably a

whole lot of other situations

or other instances of traders

taking unauthorised positions

but being found out fairly

quickly, positions being closed

out and never actually coming

into the public eye. Most

observers agree it's up to the

individual instulingss to individual instulingss to get

dn ish stutions to get their

own houses in order and for the

board and executives to put in

place the right risk framework. Milind Sathye argues its

important for auditors and

regulators to be more skept Cal about financial

institutions. At the moment the

way things are happening is

whatever the bank says the

auditor accepts and so does the auditor accepts and so does the regulator accept. The European

Union is now considering attack

- a tax on financial

transactions which some argue

may help reduce the risk of

unauthorised trading but that

may be wishful thinking. Rogue

trading has been happening for

centuries and likely to

continue frightening banks and

their stakeholders from time to

time no matter what safeguards

are put in place. And now for the latest news on the latest news on the markets

it's over to Jayne Edwards.

Thanks, Alan. And there was a

lot of end of quarter selling

on Wall Street on Friday as

investors closed out the worst

3-month period for stocks since

the depths of the GFC. Overall

the indices gave away 2% wiping

off their gains for the week.

Figures showing annual euro

zone inflation jumped to 3% in

September didn't help the

markets reducing the chance of markets reducing the chance of an interest rate cut which

would have provided some relief

for struggling European

economies. But in the US

consumer sentiment improved

slightly, even though incomes

actually fell for the first

time in 2 years. Worries about

moderating Chinese growth

weighed on commodity markets

with oil and copper both

falling sharply on Friday.

Across in Europe leaders are

scheduling more talks next week

to shore up

to shore up support for a Greek bailout after Germany's

parliament backed an improved

financial stability fund

earlier in the week. While

officials continue to pour over

Greece's books to decide

whether it gets its next round

of aid. Across the week the

picture was mixed. The US ended

flat because of Friday's slump

but the other markets had comfortable gains, except for

Europe which surged on the

German vote. Now with German vote. Now with news

affecting local shares here's

Tom Elliot. As you just heard the Australian share market like most other markets around

the world had a pretty good

week, up around 2%. A lot of

this was because of the bailout

package cobbled together in

Europe. It's been led by

Germany and if it works that

will be good for bank stocks.

We saw that on a local market

NAB was up 6%, Westpac up 9%.

If the bail out goes badly you will will see the brunt of the

selling in the bank stocks.

Some say that's already

happened. Convertly if the

bailout ends up working in the longer term hopefully we'll see

a recovery in the financial

sector. There was bad news

coming out of China. Now it

seems that the Chinese economy

cannot keep growing at the

frenetic pace it's experienced

recently and some people say

growth could slow to as little

as 5% in just a few years time. While that wasn't good for Fortescue, one of the leading While that wasn't good for

iron ore producers here in

Australia, down 11% over the

week, Rio was down 1% although

strangely BHP was actually up

1% over the same period of

time. Plenty of activity for a

change on the corporate front.

Connect East shareholders had a

rather nervous vote on the 55 a

cent share deal they were

offered. Wesfarmers shares were

up 6% after the company decided

to sell one of its many to sell one of its many coal

mines. Billabong shares up 11%.

Now it's only a rumour but some

people say that Billabong's

terrible share price

performance recently might lead

to a privatisation proposal

fairly soon. Watch this space.

Also Treasury Wine Estates.

Fosters is in the process of

being taken over. Treasury Wine

Estates up 8% on rumours it

might experience the same

Qantas shares thing. I wasn't all good news.

Qantas shares down 2% because

of strike action late in the

week that shows no sign of

abating any time soon. Winner

of the week is CSG up 38% after

receiving an unsolicited

takeover proposal valued at

$1.20 per share. Lose Erb of

the week is Ivanhoe Mines down

24% after the price of copper

plunged sharply over the week. The big deal of

The big deal of the week was

the private investment fund CP2

convincing 80% of investors in

the Melbourne-based toll road

operator Connect East that 55

cents a share was a fair price

to pay for something they

forked out $1 for several years

ago. The $2.2 billion CP2 bid

was funded by some very patient

capital in the hands of

superannuation funds from New

Zealand, the UK and Denmark. I spoke

spoke to Connect East chairman

Tony Shepherd after a rather

bruising shareholder meeting.

How do you feel having signed a

prospectus in 2004 in which you

recommended securities at $1

but you're now telling those

who bought them then to sell at

55 cents? I'm in some respects

disappointed. You know, we

would have loved to have been

going and sold at able to have kept the company

going and sold at a much higher

price or even be trading at a

higher price but the harsh

reality is I guess most the

GFC, you know, half the

companies on the exchange have

infrastructure stocks don't dropped by about 50% and

seem to be that highly valued.

So it's a reflection of the

reality of the moment. But it's

not just the GFC, is it? The

traffic forecast in the

prospectus was all wrong? As

you say it wasn't just the you say it wasn't just the GFC,

there were a number of factors.

The growth, the forecasts were

made in 2004 and the actual

growth in Melbourne was in the

north and west of Melbourne

rather than the east. And I

think the traffic patterns were

different than predicted. The

mat patterns that were

predicted were based on

experience on other toll roads

in Australia including

Melbourne City Link and that Melbourne City Link and that

proved to be different in the

outer eastern suburbs of

Melbourne. So yes, that was

unfortunate but the GFC then

forced us really into the

capital raisings because of the

state of the debt markets at

that time and that, of course,

brought about a dilution. We

still say that was the best

thing we could have done and it

certainly strengthened the company's balance sheet company's balance sheet

significantly reduced its debt,

and set the company up for the

future. But how do you feel

about the work that Hyder

consulting did back in 2004 on

those traffic forecasts? They

turned out to be completely

wrong for whatever reason and

you had to get in someone else

to refore cast the traffic in

2009? Is they're a European

firm that's 150 years old, what

with happened there? Look, I agree

with you, that is a

disappointing outcome but if

you analyse their early work,

given the state of knowledge in

2004, it wasn't an unreasonable

prognosis. You have to then

predict over a 30-year period

what the traffic's going to be

and obviously in the first

couple of years their prognosis

was wrong but if you looked at it

it over the 30-year period

their prognosis will probably

be fairly accurate. So you're

looking at a 35, 40-year asset

with a concession period and

you've got to try and get it

right every year is virtually

impossible. Now, unfortunately

in this case it was the early

years when we were the most

financially vulnerable that the

prognosis was wrong. I guess prognosis was wrong. I guess what happened was that your

ramp up period had to be

extended? Yes, and that was

unusual. I mean I've been

involved with toll roads in

and the setting up of them since the Sydney Harbour tunnel

so I've had a lot of experience

in it and the ramp up on our

previous experience on other road was different to the

roads. But after that traffic

ramp up's finished in 2015

Connect East becomes a really terrific annuity style investment for super investment for super funds and

the takeover documents actually

show that with long-term

projection s of distributions

but that was the first time

share horlds had seen that. Why

didn't you provide projections of distributions before

then? Well, as you know, giving

guidance now in Australia is an

extremely dangerous thing, extremely dangerous thing and

companies, the most they will

give is a year in advance.

However, in putting this scheme

forward we had the opportunity

under these such arrangements

to commission an independent

expert to come in and review

all of the available data and

provide this sort of opinion to

our investors. But do you think

that the Deloitte projections

are right? I would agree with

their projections, yes, their projections, yes,

certainly and to having that -

having regard to those

projections that's why we, as

aboard, unanimously recommended

the scheme to our shareholders. And there is a script alternative in the

distribution element for takeover that preserves that

Australian shareholders, but in

order to get that there has to

be a 2% acceptance level for

that script alternative. Why

was it structured like that

because it might not even get there? That

there? That was CP2 that put

forward that proposal. I mean -

or Horizon Roads more

accurately. We suggested it to

them as an alternative. They

agreed to proceed along that

path but obviously they wanted

to make sure that they had

enough acceptances to make it

worth while to set up the

administration and governance that would be that would be necessary to

maintain that element of

investment. Right, but does it

look like it will get that 2%

so that alternative will be

available? As at the day of the

EGM, no, but our investors

have, b I believe, I think it's

until about 10 October to decide. Well given the long-term forecast of

distributions that Deloitte had

in the takeover documents,

shareholders would you recommend that small

shareholders accept that or the

cash? We have in our ex-plantry

memorandum said that we

recommend the cash alternative

first and, you know, because

we're not privy to everything

in the future, we believe that

the cash alternative gave

investors greater investors greater certainty and

of course the scrip alternative

does not offer the same level

of liquidity that you would get

out of a listed stock. But if

you're a long-term superannuation investor that

may not be that important? That

may be of a lesser concern if you're a long -term investor,

yes, I agree. How important in

your decision to accept the

takeover offer was the fact

that you've got $800 million

year? That had worth of debt to roll over this

year? That had an impact on the

board. You know, debt markets

or world markets are still

volatile and un certain. In the

normal scheme of things I

believe we would be able to

roll that debt over. Obviously

at a much higher cost. But, you

know, who can tell? I guess

that was another factor of

uncertainty in the future that

influenced the board in influenced the board in terms

of recommending a more certain

scheme now rather than waiting

to see what happens. Thanks

very much for joining us, Tony

Shepherd. OK, thank you, Alan.

Like many other manufacturers

Australia's carpet makers have

been on the mat in recent

years. There's been cheaper

overseas products, high wool

prices, as well as prices, as well as the increasing popularity of

alternatives like floor boards.

But despite all this there is

one Australian factory which is

reporting steady growth thanks

in large part to some Kanny

capital investment and a

conscious effort to tackle the

overseas competition's weak

spot. In the early days to make

one or two rolls of carpet a one or two rolls of carpet a

day was a big deal. They used

to source bales of yarn from

auction and they used to have

it wound up and spun in their

own factory. Quest Carpets has

come a long way from very

modest beginnings. It's also

witnessed the transformation of

an industry. This market in the '70s and '80s

'70s and '80s was dominated by

wool. Today we've got

polypropylene carpet, nylon

carpet, it's a broader market

and thus more people can play

in that market. One of the key drivers behind the change has

been the globalisation of

carpet production. In these

last few years you've seen the

Chinese buy a lot of the New

Zealand wool and that's driven

the price of the wool, it's sky the price of the wool, it's sky

rocketed, especially the last 3

or 4 years. Adapting the

factory to tough nylon instead

was in hindsight a prudent

move. If we were still in wool

today I don't think we'd be

having this interview because

we wouldn't be around anymore.

Having solution-dyed nylon

become popular in the market

place it's given us the ability

to grow our business. In 2007 to grow our business. In 2007

our turnover would have been

$30 million. Today it's $47

million. These numbers are all

the more impressive because the

last few years have been far from gret for the industry. Yeah, it's no doubt

it is shrinking. We have got

more competition from imports,

we've got competition from

timber floors, laminates, and

even carpet tiles. Stephen

Sunderland has placed his business on business on a firm footing by

seeking out his competition's

Achilles heel. The consumer in

Australia is quite demanding.

If they order carpet one day

they would literally like it

delivered and installed the

next day. With importers that's

a very difficult thing for them

to handle. So we've been able

to not so much compete on price

but compete on other styles of

our business - quality and our

ability to deliver the

ability to deliver the carpet. This has meant

investing heavily in the

factory's carpet and yarn stock

levels. Where there's been a

particular demand for a colour

or a style we'd like to think

that we have the yarn to back

ourselves up to create it into

carpet very quickly. When

you're dealing with overseas

suppliers it's literally 16

weeks from the day you order

yarn to receiving it. So if you waited on waited on every batch of yarn

you would be a long way mind

the market. The factory owner

says he will be sticking to the

strategy despite Australia's

stagnant housing market. It

does take time to flow on.

While the applications are

lower today, there is that lag

time of 6, 7 months. We felt it

on the lower end of the market

the first home buyers but the

middle market not as much and

the higher end of the market is

still performing still performing very well.

Steven Sunderland says

investing in sophisticated

machinery has always kept the

factory competitive. We're as

good as any overseas carpet manufacturing business and

that's been able to keep our

labour components down and also

to keep our quality up. But Quest Carpets isn't immune to

the downside of a strong

Australian dollar. We're only

buying 2 components from buying 2 components from

overseas whereas the importer

brings a whole finished product

so he gets the full discount of

the dollar that we don't get.

We also have to wear the

fluctuations in the oil prices

and we've felt that with our

yarn prices. Any increase has

been offset to a degree with

the dollar but not enough, not

that our prices haven't gone

up. Steven Sunderland says

remaining flexible and nimble remaining flexible and nimble

will remain the key to his factory's future. At the end of

the day we are in the fashion

industry so we listen to the

consumers and the retailers.

And that's it for the program.

Now if you'd like to check out

any of our stories and

interviews again, we'll have

transcripts, a video and a

vodcast posted on our website a bit