I tried showing a little sympathy for Bill English last week. That'll teach me. The Tiwai Pt deal has fewer reedeming features that I dared hope and may make little difference to the Meridian float

I had a couple of interesting conversations over the weekend – and have done a little quick background reading – which have together been enough to think I was too kind to Bill English and National in my Friday post about the Tiwai Point subsidy.

My views of the politics hasn't changed – they were damned either way. Yes, it was a ridiculous piece of hypocrisy from English of all people. When he was leading the National Party you wouldn't have dared to try to spell subsidy in his hearing, let alone give such a large one to a multi-national company. Yes, it put the Opposition parties in an awkward position, because Labour in particular can hardly seen to be anti-jobs, anti-workers and anti-regional development. And yes, this was about getting Meridian on the block with far and away its largest customer intact. Without the smelter, it would have been farcical to take the company to market.

However my understanding of the economics, while still hardly comprehensive, points to this being a worse deal than I appreciated. An eternal optimist – and one who is smart enough never to say never when it comes to markets and commodity prices – I had thought there might be a way forward for Tiwai Point: A new price, a new exchange rate, a new product, a new model.

Well, tosh to that.

I knew the aluminium price had fallen by eight percent this year, but that's a three year low with no sign of recovery. The reason Tiwai Pt has no chance is China, which produces nearly half the world's aluminium.

China produced 10.5 million tonnes of the stuff in the first half of this year – up 11 percent on last year, which matches growth from the year before that. All that expansion, yet close to half of the country's smelters are running at a loss. As the FT reports:

Despite this, smelters are being built nationwide, even though producing the metal requires huge amounts of energy, water and bauxite, all of which are scarce in China. Foreign producers are also being forced to close because of the excess supply spilling out of China.

But not Tiwai Pt. Yet. But all that power these plants need? Check out this from Reuters:

Producers [in Guizhou] will be allowed to build three new power plants to directly supply their smelters, effectively cutting the cost of power by around a quarter and the cost of aluminium production by around 10 percent.

It remains to be seen whether this is a template for hard-pressed smelters in other provinces.

There is also talk that the central government is being lobbied hard to relax some of its export tariffs on aluminium products.

So Chinese regional governments are building smelters to drive industry in competition with each other and there's even a state stockpiler, as this CNBC report mentions, which has bought up 400,000 tonnes of aluminium to stop the price going even lower. About 700,000 tonnes worth of capacity has been idled so far this year given the over-supply and low price; but "idled", you'll note, not shut down.

The talk of idling and reducing the output of older smelters (like Tiwai Pt, note) could give you hope that the price will improve. If China lowers production... Except that it seems China's really only running down the older ones because it's so busy building building newer, faster, allegedly greener ones.

The country has more than 23 million tonnes a year of primary aluminium production capacity currently.

And there's more to come. In short, China has the market cornered every which way. Tiwai Pt will be a price-taker as the price stays low or goes lower.

Yet we're putting $30m into an old smelter which Rio Tinto reckoned this year is only worth $14.8 million.

So I think I was too kind. Especially when, after I wrote the earlier piece, I learnt there was no job protection as part of the deal and some workers won't even get the three years' grace this deal seemed to offer.

I had one other 'a-ha moment' over the weekend, which I intended to write about today – only to see that Jane has somewhat stolen my thunder in her comment on my previous post. I'd read the business commentators saying the deal would protect the Meridian deal and the government would make the $30m and more back in its float.

But the blindingly obvious finally hit me yesterday – if share-brokers know that Tiwai Pt is essentially munted and the contract only buys them a few years, why would you be willing to pay more? Where's the premium in knowing Meridian will lose it's biggest customer in a couple of years, rather than this year? Who'd be mug enough to buy when you know power prices will fall, and therefore Meridian's revenue, and therefore its stock price?

My guess is that National will be struggling to get significant interest in the market for the kind of price this asset deserves; it'll have to come up with some creative sale incentives. Sure, Meridian has great renewables on its balance sheet, but if the company that uses 14 percent of the country's power is a dead-plant walking, where's the value?

Then there's the opportunity cost. The $30 million from National may save Tiwai Pt temporarily, but it does so by keeping power prices higher than they'd otherwise be, right? So how many New Zealand companies, how many other jobs, might have been saved by a cut to their power costs?

No, this is a bung deal all round. (I agree Jane – we're on the same page!).

I'm not even sure it will give National the boost it needs for the Meridian deal this year, let alone for the election next year. I come back to one of my favourite quotes – one from Jim Bolger in 1988, which I've used before. He said on partial privatisation:

“...any sale would only proceed at a time of maximum advantage for the taxpayer”

The Tiwai Pt sell-out confirms that this is simply not that time.

 

Comments (9)

by Philip Grimmett on August 12, 2013
Philip Grimmett
Good to see you join the dots Tim. This deal is to buy votes in true blue Southland @ next year's general election. Minimum of $12500 per vote, if all 800 jobs are saved, which is highly unlikely. This is votes for sale. Market forces at work within the current government. Bill English sleeps with Rio Tinto, eh? Was he awake, asleep or drugged at the time?
by Ross on August 12, 2013
Ross

Philip

Bill English holds a rather sizeable majority in the seat of Clutha-Southland. Even if every voter at Tiwai voted Labour, his majority would not be severely dented. You can criticise this deal on whatever grounds you like, but "buying votes" seems a stretch.

by Ross on August 12, 2013
Ross

Tim,

One thing you didn't mention is that Rio Tinto will be required, once it abandons the smelter, to restore the site to its former glory. This apparently won't be a cheap exercise. Isn't that part of the reason for the drop in its valuation of the smelter?

by Brent Jackson on August 12, 2013
Brent Jackson

"Yet we're putting $30m into an old smelter which Rio Tinto reckoned this year is only worth $14.8 million."

Why didn't they just buy it then ?  Should've only cost taxpayers half as much.

by Philip Grimmett on August 12, 2013
Philip Grimmett

Ross, it wouldn't be only (!) 800 jobs/votes, but the knock on 'multiplier' effect throughout the  region. retailers, shopstaff, teachers, tradespeople,

etc.  

The entire local economy would slump. Tim Shadbolt clearly understands this and is fighting for his folk down there. Let's not forget that the government is swallowing ' it's own dead rat 'free market' dogma. Ha, ha, ha. How Bill English can justify this is laughable, and tragic for the poor suffering in houses they can't afford to heat because of this jack up in the price of electricity. Not to mention that it probably props up the sell off of Meridian. This is pork barrel politics and represents a desperate government giving away our taxes to Rio Tinto in an attempt to not rock the sinking ship of Skipper Key. 

by Tim Watkin on August 12, 2013
Tim Watkin

Ross, you're right. English isn't at any risk in Southland. The 'buying votes' argument is more around making sure the asset sales programme doesn't go belly up and embarrass the government.

And I don't know what the clean-up implications are... Anyone?

Brent, an interesting question.

by william blake on August 12, 2013
william blake

Why didn't they just buy it then ? 

 Subsidy must make the neo-cons bilious but nationalisation would be the full fainting fit. ?

by Ross on August 14, 2013
Ross

And I don't know what the clean-up implications are... Anyone?

I did see a figure of $400 million quoted to clean up the site but I have no idea if this is accurate.

by Jane Beezle on August 16, 2013
Jane Beezle

Thanks for the kudos, Tim.  Normally Prof Geddis gives me a kicking on subjects I know something about.  It's nice to get warm fuzzies about something I know very little.

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