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Outlook for coal market worse than at the bottom of the GFC, Solid Energy says; 'Reason why full Crown ownership is not suitable'

Outlook for coal market worse than at the bottom of the GFC, Solid Energy says; 'Reason why full Crown ownership is not suitable'

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.

See Solid Energy's results presentation here.

See the media release on the results here.

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"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."
Is it any more suited to private ownership?  Who would buy it (other than China)?  Is ownership the issue or just management?  Is it possible to even change the business model in today's changing economic environment?

Exactly....what a gormless statement.

It is not a gormless statement at all.  The comment highlights the fact that no business or investment is a one-way bet, and it is fundamentally unjust to place this risk on taxpayers rather than people who have made the choice to invest in the company. 

I think we are crossed purposes, I dont think you have the context. In this case there is no difference or impact of who owns the business its simply doesnt matter in a business sense, hence its gormless.
Yes sure its almost in-arguable that Govn shouldnt be in this business in a business context. There is simply no reason for the Govn to own a coal mine(s) supplying coal offshore, plain crazy IMHO.
The same applies to AirNZ we are carrying a huge risk of loss for no gain that I can see.  Hence it should be sold off immediately for whatever we can get to privte business who profit from their skills.
However if its a resiliancy context ie the well being of the Nation then yes it should, for instance electricty production and supply. Then yes the Govn should be closely involved.

was expected by “virtually nobody”.
Some of us have been talking of a downward saw-tooth for some years. And we weren't even Rhodes Scholars. Just people applying ligic, and not trained in (flat-earth) economics.

One wonders whether the proposed sale by the govt. is part of what's prompting the review and job cuts ...?

Of course there has been no suggestion that the man in charge is any way affected by this appalling result - his[ and his board level cronies] bloated salary and benefits package is totally imune from the reality of his organisations pathetic lack of foresight /planning - As usual it is the workers who actually produce more than just hot air who  are the ones who are sacrificed on the alter of expediency! 
In my humble opinion it is way past time to start chopping the fat cats off at the knees- and making them pay for the chopping equipment !

To be fair the volitility of energy is be be expected post-peak oil and we fall in and out of a recession....What he is saying is going to be the same in the private board rooms throughout the world. 

very believable comments from insiders probably hoping to pocket big time from sale process.

It's somewhat encouraging if there is not a good business case for coal mining, from an environmental perspective.

Yes and no.....yes its good coal is bad, no it isnt because the very same thinking can be applied to other commodities.  So while it makes sense not for a business to supply something because the risk is too great and rewards too small if its of strategic importance to the Nation thats bad. All thats left is for teh govn and in turn us to take the risk....and if it means eating say there isnt a choice is there?

If you think we have problems .....Watch the Aussies take steps to weaken the Au$ in the next few weeks , they cannot sustain the massive drop in Iron Ore and Coal prices which  form the backbone of their mining sector .

Boatman: I have a different view. The largest miners are the foreign owned miners BHP, RIO, and Xtrata. They are the ones affected by falling commodity prices. The recipients within the AU community of the proceeds of commodity exports are the States in the form of royalties, and wages and expenditures on extracting and shifting product to shipping facilities. On the other side of the coin is the $400 billion pipeline of planned capital investment in developing new mines (or expanding old ones) and bringing them on line. That expenditure does stick to the sides of the country. Export revenue tends to be offshore, accounted for offshore, and spent offshore. It's only when it comes back in, in the form of new Capital Investment does it benefit the country. As to royalties, both BHP and RIO have a special arrangement with the West Australian government that gives them a special reduced 1% royalty from the Pilbara, and the agreement has run for 40 years and the state is trying to break the agreement. NSW and QLD charge 6% which is the standard. But, if you go and have a look at the Northern Territory Web site relating to royalties your head will hurt trying to read all the carve outs and exemptions. SPOT prices for Iron Ore and Coal have fallen 40% over the past 3 months, yet the AUD is still above parity. I would be careful betting against it.
If all that makes sense, you will understand why the Federal Government is so keen to introduce an MRRT (mineral resource rent tax) because the country has not benefitted from the massive hike in prices over the past few years. The offshore foreign owned miners did. There is a huge message there for new zealand selling off its assets to foreigners.

Fresh ideas for the Westcoast !
In the current environment the whole world is drilling and mining prices to dead. Why not export fresh water ?
Could the government with the private industry together not develop potential green industries ? The Westcoast with it’s massive rainfall and unemployment rate offers many opportunities.
Example: Minister Steven Joyce it would be far economical and sustainable for our county to instruct our R & D department to find solutions transporting fresh water to Australia and other countries, then do the same economic activities  100 other countries/ companies do exploring/ drilling oil.
With so much potential - why don’t we do things different in this country ?
Persuing our own destiny !

Thank you for that CO. I think the prober and sustainable way of developing an industry dealing with West coast water needs the involvement of government.and Iwi.

"worse than at the bottom of the GFC"
That's a bit of a pre-ejaculation, we aren't anywhere near the bottom of the GCF yet. There are still years of deleveraging and economic contraction before this Great Depression 2 gets anywhere near close to a bottom.
And then, to paraphrase a certain Aussie band, it's a long way to the top, if you have a SPOT of coal..."

@Iconoclast I rerspect your views , but its contrarian views that make a market work.
Remember the mining Coys incur their expenses in AU$.
A strong $ and falling prices = disaster.
I believe the Aus$ strength is driven by two elements , firstly the problems in the Euro , US and Japan with money printing and near zero rates .
The second is the earnings from resources have propelled Austarlia to near full employment , and created a boom and Dutch disease.
My reasonoing is that the fall in coal and ore prices will need to be offset against a weaker AU$ simply to stay in business
The Aussie Central bank must know this and must act now 

yeah boatman & iconclast
they are all a bit surprised over here about the ore price fall. I am  with the rate cut as rich as they are the gfc is finally been felt here in OZ. 17% down on building in july even with the last cuts!!!  NZ wont buckle we will stay the course to capacity destuction. 

The implication is that an SOE cannot be commercial, or make tough choices regarding having an efficient staff level. While possibly accurate, that seems a massive cop out from an outgoing Chairman, and a fairly poor excuse for not having driven tough commercial decisions.
If indeed this is the culture/ expectation of SOEs, it needs to be publicly outed and condemned. They must be run efficiently is the answer, and that needs to be stated very clearly; with a little bit of government backbone in supporting it.
Selling them off for this reason is another cop out.

Stephen L - you're right - so why did Labour set up the model? We're lucky they faltered before Tomorrows Schools became cannon-fodder too. Stuck in embyonic form, like Health.
Start a new Party. One which understands what a finite planet is. I don't mind altruism, but altruism based on growth is a lie.


What a tangled economic web we have weaved!
Coal use down - bad for the economy/ good for the environment.
NZ dollar high - bad for the dairy industry's returns,  but good for the input side costs.
Import cheaper kiwifruit pollen, and then get hammered by PSA
Use antibiotics to game the system, then watch as resistance builds faster than mans' 'intelligence' can cope!
Interest rates are low - bad for the savers, but great for the borrowers.
Seems that the path to economic salvation is getting oh so narrow now, and that it is increasingly  hard to get all those factors just right! 
Lets face it, we are approaching the endgame for the current economic model. A major part of the problem comes from not calculating GDP correctly. For instance, why doesnt the reduction in coal reserves/ environmental quality/ opportunity cost of capital ever get deducted from the value of export receipts. What then are the returns on mineral exploitation or dairy farming. Or, as recently revealed, what value loss has occured from Cadmium contamination of our soil/food.  
Until all costs are recognised, we will continue with malinvestments, and continue to reward the wrong players.
A car crash still adds to GDP. Economics is not a miserable science because it is NO science at all. Failed engineers playing fools poker more like.
Nature bats last, or something along the lines ...' mother nature grinds slowly, but ever so finely"

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.
Using this logic Landcorp should go as well......
We didn't hear this message when the coal price was bolting...
Some would think that govt. was just the patient investor needed....
Unless the problem with govt ownership are the often trotted out excuse of the rubbish mgt and board of govt. owned busiesses. Is that what Palmer means?

.. worse than at the bottom of the GFC ..
Well that's a tellingly dumb statement to start - given it assumes the GFC has already bottomed out.

at best we are in a dead cat bounce.....