By Alex Tarrant
The risks inherent in state-owned coal miner Solid Energy’s business are the “very best reason” why the company should not be under full Crown ownership, the company’s outgoing chairman John Palmer says.
And CEO Don Elder says the situation in the coal market is "much worse" than during the bottom of the Global Financial Crisis, when stimulus packages from China and the US, and the falling New Zealand dollar, cushioned the impact of falling coal prices and demand.
Those saving graces were not in the picture this time around. Prices, which had plunged since July, and were down about 40% from a year ago, might stay at their current levels for anytime between six months and two years, Elder said.
Solid Energy is one of the four state-owned energy companies the government plans to partially privatise over the next five or so years. While Solid Energy had always been considered to be the last of the four to be partially privatised, the viability of the company's operations and outlook has been questioned in recent weeks.
Blaming plunging coal prices and a stubbornly high New Zealand dollar, Solid Energy this week announced a major review of its business structure – leading to potentially hundreds of job losses mainly at its underground mines.
Releasing the company’s annual results for the year to June 30, Palmer said on Friday that the risk profile of Solid Energy’s business model – its commodity nature and the ability of its fortunes to make a huge about-turn in a matter of months - meant it was unsuited to full Crown ownership.
Solid Energy today reported a loss of NZ$40.2 million in the year to June 30, 2012, a huge turnaround from a profit of NZ$87.2 million in 2011.
The loss was driven by NZ$110.6 million worth of impairments booked at June 30 on its underground mines Spring Creek and Huntly East, its renewables projects, and coal seam gas project in Huntly.
Solid Energy said on August 16 the review was triggered by a recent steep fall in demand and prices for coal. At the same time, the New Zealand dollar had not fallen in tandem with falling commodity prices.
The industry consensus was the market bottom remained “some way off,” CEO Don Elder said last week.
Today Elder said the dive in international coal prices from early July was expected by “virtually nobody”.
The current market downturn could last for a “relatively long” time, he said.
While prices rebounded after a slump in 2008 – which was also aided by a fall in the New Zealand dollar – the information the company had now showed no prospects of a turn around like that seen in 2008.
Stimulus programmes enacted in China and the US during the financial crisis had not been repeated this time around, Elder said, adding the New Zealand dollar had remained around 81 US cents.
“This is much worse than the bottom of the GFC,” Elder said.