Roger J Kerr says we should as a nation be taking advantage of the opportunities the pandemic crisis presents

A reflection back on some of the advocacy and insights of this column over recent months, since the Covid-19 shock/event risk disrupted the NZ and global economy, would reveal that we should as a nation and as New Zealand Inc be taking advantage of the opportunities that such a crisis presents.

The initial opportunities identified by various entrepreneurial spirits were around leveraging our position as a Covid-free safe haven and selling education to foreign students in special quarantined bubble locations, facilitating foreign film makers, an international technology hub and staging global sporting events. Some of these ideas are turning into fruition, however, the Government has largely decided that it is all too hard until the borders can fully re-open when a vaccine is available.

What has emerged over recent weeks is that there may be other, more substantial, business and investment opportunities for New Zealand Inc in other industry sectors to provide jobs and financial returns to risk takers with capital to deploy.

One of the criticisms from the general public and some of our politicians over the last 40 years has been that New Zealand has allowed far too much of our businesses and business assets to be sold into foreign ownership. Banks, retailers and primary industry processors (outside of the local co-ops) are largely foreign owned. We have a structural and permanent Balance of Payments Current Account deficit every year as profits and dividends from businesses located in New Zealand are owed/paid to foreign owners.

Of course, all these businesses were acquired by foreign owners at prices that New Zealand investors were not prepared to pay (at the time) and the business sellers who got the cash could reinvest the proceeds into new growing local businesses. Unfortunately, that did not always happen, and it is only in recent years with the build-up of KiwiSaver investment funds that there is capital available locally to back such enterprises.

Foreign owners are no different to local owners of a business, they need to make a profit return that exceeds the cost of their capital so that they invest and expand. If that occurs it is good news for our labour market, the tax base and the economy. 

However, sometimes foreign owners are weakened, distracted or prone to very short-term business investment time horizons. Such situations provide opportunities for local investors to buy business assets at knocked-down bargain prices and thus suddenly the return on capital equations are both attractive and sustainable.

Potentially, there are current opportunities from the Covid situation for New Zealand Inc to “buy back the farm” from foreign owners (mostly Australian) who seem prepared to sell.

We have witnessed that there is plenty of investment capital available in New Zealand to take advantage of opportunities with the large capital raises for listed companies such as Auckland International Airport and Kathmandu.

Admittedly, the business and financial risk profile of the opportunities listed below are a lot different to a monopoly airport tolling station! However, they are all based on the same assumption that there will be Covid vaccine eventually and within two to three years the global economy will return to normalcy.

Foreign-owned business assets that could return to local ownership and control include: -

Tiwai Point aluminium smelter: Majority shareholders, Rio Tinto (Sumitomo Chemical have 20%) have signalled that the low aluminium prices caused by lower Covid-related global demand (car makers) means that they will close down the smelter within 14 months as it is no longer profitable. Whilst the plant is 50 years old, it does produce the purest/highest quality aluminium in the world. Rio Tinto are liable for hundreds of millions of environmental remediation; therefore, they may well pay up for someone to take ownership off them, rather than just close it down. The reinvestment required into new technology for the plant to be internationally competitive may be a hurdle too big for local investors. Investment bankers can crunch those numbers. However, based on assumptions that aluminium prices will recover in the medium term, the plant could well be profitable if all the financial risks are appropriately managed. As it is US dollars out to pay for the alumina from North Queensland and US dollars in from the sale of the aluminium to the Japanese, the processing costs (labour and electricity) are in NZ dollars and if the NZD becomes too strong profitability suffers.

Rio Tinto as a multi-national mining company do not separately manage/hedge the NZD/USD currency risk on the smelter’s NZ dollar processing costs. An examination of the profitability of the smelter over the last 40 years would show that it makes good money when the NZ dollar is in the 0.5000’s and 0.6000’s, but struggles above 0.7000 (subject to the aluminium prices). New owners would need a long-term FX hedging regime to protect profits. Rio Tinto have laid-off some of their aluminium price risk and NZD/USD FX risk as price adjustments in the electricity supply contract with Meridian Energy. New owners would need to work alongside Meridian Energy, rather than the adversarial negotiations on the electricity supply price which has been a feature of the past.

A rare opportunity to own a large industrial asset for minimal cost if the risks are understood and supply/sales agreements are contracted-up on both sides. The Government does not need to risk taxpayer’s money as shareholders; however, they have a role to play in helping to return the plant to local ownership and retain the jobs in the south

NZ Steel Glenbrook plant: Aussie owners, Bluescope Steel have the plant under strategic review as global steel prices are depressed from Covid-19. The plant is also 50 years old, however, it produces a unique grade of steel (finer grain due to the unique iron sands ore) that appears to have international demand. Whether the plant can be profitable under different owners will depend on the business case assumptions around steel prices, currency, interest rates, energy costs, freight/transport costs and labour costs.

Marsden Point oil refinery: Not entirely foreign owned with the local share market listing for NZ Refining and Z Energy also a major shareholder. Overseas oil company shareholders, ExxonMobil and BP may not see the refinery as globally competitive anymore, thus yet another strategic review is under way. The NZD/USD exchange rate does play a part in the company’s profit performance as their refining commissions are effectively denominated in USD’s against local NZD labour and energy costs.

Bank of New Zealand: Market speculation/rumours have surfaced again that BNZ’s owners, National Australia Bank may look to sell the bank as more capital is required under the RBNZ requirements. A price tag of $7 billion would be too much for the local institutional investment funds, however large Aussie funds would like the diversification of a listed bank in New Zealand. Local big-hitter investors ACC and NZ Super Fund are conflicted with their existing ownership of Kiwibank.

My view would be that local owners of these large businesses (which are all important to the economy) would do a superior job on managing the commodity, energy and currency price risks to protect/enhance profitability than the current offshore owners.

In the meantime,…………………

In global FX markets the USD continues to weaken, however the Kiwi dollar has been unable to make further gains against the USD above 0.6600. Short-term, the Kiwi is vulnerable to the RBNZ increasing the QE amount on 12th August and a correction downwards in US equities markets. Entry rates for hedging around 0.6300/0.6400 remains as the strategy for exporters.

*Roger J Kerr is Executive Chairman of Barrington Treasury Services NZ Limited. He has written commentaries on the NZ dollar since 1981.