Posts
This
excellent article is reposted from Frank
McSkasy's blog to give the widest possible readership.
His
blog is available HERE
The
real cause for Solid Energy mass redundancies?
26
April, 2012
On
16 August, Solid Energy undertook a review of it’s operations and
workforce. CEO, Dr Don Elder, announced,
”While many in the industry still expect demand, driven by Asia, to pick up again strongly sometime in 2013 Solid Energy needs to plan to withstand these market conditions for at least the next 12 months and possibly for 24 months or longer.” he says. “As a consequence, we are reviewing all areas of our business, including current and future operations, all fixed and variable costs, and the values of some of our assets, which will result in us taking significant impairments. Our aim is to preserve cash through reduced spending while, as far as possible, maintaining our longer-term value opportunities.”
By
29 August, Solid Energy announced 140 jobs to go and a
suspension of operations at Spring Creek mine on the West
Coast. A further 123 jobs were to be cut at Huntly East Mine in
Waikato.
The
following day, that number had risen to 250 job losses on the west
Coast, and as one Greymouth retailer put it,
” Two-hundred-and-fifty jobs, we’ve got a population of 8000 – it’s probably the equivalent of 40,000 people in Auckland jobs getting affected, so that puts it in perspective. “
On
the same day, Solid Energy reported a “loss” of NZ$40.2
million in the year to June 30, 2012, compared to a
profit of NZ$87.2 million in 2011. (More on this shortly.)
No
one can rationally argue that job losses on this scale, with ensuing
loss of wages and company spending, will have a devastating
impact of the West Coast economy. The losses will cause
incalculable harm.
Solid
Energy has attempted to justify redundancies by pointing to a drop in
international coal prices; a fall in demand from China; and a
$40.2 million “loss” in profits.
Two
of the above reasons have a degree of merit – the third reason has
been mis-represented to the public.
International
Coal Prices
Coal
prices have indeed dropped.
From
a recent high of NZ$185.47 per metric tonne in January 2011 – to
NZ$113.33 at the end of July, this year. This is a drop of NZ$72.14
per metric tonne.
However
the July 2012 price (NZ$113.33 per metric tonne) is
not much different to the November 2009 price of NZ$115.52 per
metric tonne.
As a result of the November 2009 low price, Solid Energy had minimal
redundancies,
“There were 18 redundancies in the year at a cost of $367,050.”
That
figure of 18 redundancies is in stark contrast to the 360
redundancies this year.
.
.
Demand
from China
There
is no doubt; demand for coal from China has dropped,
” Globally diversified miner Anglo American PLC said the global thermal coal market looks bearish in the short term, partly due to displacement of U.S. coal demand by shale gas and an economic slowdown in China, but it is still an attractive market over the medium to long term.
“In the short term, we will have a bearish market,” Norman Mbazima, chief executive of Anglo American’s Thermal Coal division, told analysts at a seminar. But “there is very good demand outlook for coal. Coal will continue to be the mainstay of electricity production in the world and this will underpin good prices into the future,” he said.
Gareth Griffiths, head of Anglo American’s Thermal Coal Marketing department, said that the main reason behind the recent collapse in thermal coal prices has been a slowdown in Chinese coal consumption growth.”
” Coal demand is also expected to be fragile amid a weak economic outlook for the rest of the year.
A Reuters poll forecasts this year to see the slowest full-year of economic growth since 1999 as demand for China’s factory goods falls due to the debt crisis in its biggest customer the European Union.
“The coal market will remain challenging,” said Ivan Lee, a coal analyst at Nomura Bank.
FACTORY-DRIVEN REBOUND
Chinese coal prices can only rebound if demand recovers considerably, which requires the manufacturing purchasing managers index (PMI) to rise above 50, economic growth to climb above 8 percent and power plants’ coal stocks to fall by half, Lee said.
The data, however, is not encouraging. The latest PMI showed China’s manufacturing sector contracted at its sharpest pace in nine months in August, with the index falling to 47.8 from 49.3 in July.
Even if China decided it needs more coal, which is unlikely, it will not seek it abroad as imports have become more expensive than domestic supplies, traders said.
Australian imports, based on the globalCOAL index, now cost around $3 per tonne more than Chinese prices, although some traders are selling blended material at lower rates. “
Whilst
this may impact on Solid Energy’s profits (as compared to this year
and 2011), Solid Energy’s viability does not seem threatened.
The
only threat to Solid Energy is it’s saleability.
The more profit Solid Energy makes – the higher the share price
when it is floated on the Stock Exchange. By contrast, the lower the
the profit, the lower the share price.
Which
may explain Bill English’s comment in the media item below,
“English – Solid Energy not ready for sale”.
Solid
Energy Profits
According
to Solid Energy’s own Results
Announcements 2012 report,
the company’s income was actually better than the preceding year,
Good operating performance overtaken by asset write downs
• Trading performance was good in a deteriorating market with strong NZD. Underlying earnings were $99.7 million (2011: $86.2 million).
• Asset write downs of $110.6 million net of tax and other adjustments have resulted in a $40.2 million loss after tax (2011: $87.2 million).
In
plain english (not the mumbled Prime Ministerial
version), Solid Energy made an after-tax profit of $99.7 million –
an increase from $86.2 million in 2011.
Employing
a book-keeping, accountancy “trick”, Solid Energy
reduced theire own asset values by $110.6 million. (That’s
like saying your house was worth $300,000 in 2011, but only
$250,000 this year. You still have your house and you’re living in
it – nothing else has changed. Only the theoretical valuation has
‘reduced’. Next year that valuation could rise back to $300,000
or even more or maybe less. That’s creative accountancy for you.)
The
point is that Solid Energy’s profit rose from $86.2 million to
$99.7 million.
In
fact, Solid Energy’s revenue in 2012 was $978.4 million – almost
a billion dollars –
18% increase franom the previous year.
.
.
See: Ibid
“Good
earnings” indeed!
Any
“loss” by Solid Energy is there a paper loss only; an accounting
mechanism to revalue assets. It’s profits remain unchanged.
Solid
Energy therefore cannot rely on an imaginary “loss” to justify
redundancies – because there was no loss.
It
is noteworthy that Solid Energy’s decision to “mothball” Spring
Creek mine and reduce staff at Spring Creek and Huntly follows one
week on from this event,
.
.
Don
Elder rejects all allegations that planned redundancies are a
covert attempt to increase Solid Energy’s profitability by reducing
it’s labour costs,
“This restructuring is not about increasing value, this is about saying `we have to do what we can afford to do.”
To
which this blogger replies,
- There has been a downturn in international coal prices, and,
- Despite that, Solid Energy is profitable and it’s 2012 revenue exceeded last year’s, and,
- Bill English stated on 21 August that “We wouldn’t be planning to float it [Solid Energy] any time soon”, and,
- A week later Solid Energy announced 250 redundancies and the closure of Spring Creek mine and,
- By contrast, there were only 18 redundancies in November 2009, even though the price per metric tonne was similar.
Coincidence?
I think not.
Despite
Elder’s protestations to the contrary, this blogger has no doubt
whatsoever that Solid Energy employers and the entire West
Coast are paying dearly for National’s privatisation agenda.
There
are some very dirty back room deals going on, and the wafting smell
ain’t methane escaping from West Coast mines.
No comments:
Post a Comment
Note: only a member of this blog may post a comment.