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.