Scoop Election 08: edited by Gordon Campbell

On the Solid Energy debacle

March 15th, 2013

So according to its former chairman John Palmer, Solid Energy could have done nothing about the sudden and dramatic fall in the price of coal. Move on, no one to blame here. It was just like the Christchurch earthquake, an act of nature. Except of course, it wasn’t. Somehow, the highly paid hotshots running Solid Energy and the deadly duo of former SOE Minister Simon Power and Finance Minister Bill English – who shared governance responsibilities for the state energy company – failed to notice that there had been a Global Financial Crisis in 2008. That made it a risky time to take on debt and assume that global demand would enable you to expand and still make ends meet.

By 2011 – a year before that sudden, dramatic and totally unexpected fall in the price of coal – China was already well into a serious economic downturn, the worst since its initial response to the GFC in 2009. There were widespread fears things would get worse.

In part, China’s downturn was being driven by increased competition from its Asian neighbours, and partly by decreased demand for Chinese goods from developed nations still recovering from the Global Financial Crisis. How hard is it to work out that when China (whose hitherto insatiable growth demands had created a price bubble for coal) is experiencing a relatively severe economic downturn, that the price of coal will fall? Especially given that in the Budget 2011 documents, the government apparently spent quote “ a total of just under $2.900 million for the provision of information on stock and flow levels of the energy and minerals sectors?” Nothing fancy was required. The basic process at work here is called supply and demand – and from what I’ve heard, that usually has an effect on price.

Solid Energy at least, could read the warning signs. It tried to resist the pressure to take on more debt from a government greedy for bigger dividends:

Appearing the day after Labour revealed former State-Owned Enterprises Minister Simon Power told the company to take on more debt and pay higher dividends, Mr Palmer said the company opposed that request.
The debt levels or gearing suggested by Mr Power and Treasury officials were higher than “we thought was an appropriate level of gearing given the nature of the industry we were involved in”, Mr Palmer said.

And yet… the government is now trying to shift the blame back onto Solid Energy, and is in total denial about its own driving role. Under fire, it has struggled to keep the spin needs of one day from contradicting the spin needs of the next:

Yesterday afternoon SOE Minister Tony Ryall was saying Solid Energy’s problems were not due to its debt. “The problems with Solid Energy come from the fact that the board made a number of investments that didn’t generate the returns that they were expecting and together with the most significant collapse in world coal prices,” he said.

But Labour leader David Shearer said Mr Ryall’s comments were “the complete opposite” to Mr Key’s comment that a key contributor to Solid Energy’s woes was that it “added gearing to a company that historically had not had gearing”.

It gets worse. Judging by yesterday’s testimony by Palmer, Key has been blaming Solid Energy for ratcheting up a debt gearing that his own government had virtually forced upon the hapless company, whose management had thought it unwise. And who are now being blamed by the same government for following instructions.

Put it this way. If racking up $389 million in debt due to a suicidal growth strategy doesn’t count as a failure of management (by Solid Energy) and governance (by Power and English) what would? An independent inquiry would at least expose the reckless logic that was being pursued. Fat chance of that happening, though. Looking ahead, what are the implications of Solid Energy’s current woes for the price it is now likely to fetch within the government’s planned garage sale of New Zealand’s energy assets? It wasn’t so long ago that Solid Energy was being tipped as the item most likely to attract serious foreign investors, largely because of those precious coal reserves. It was assumed the Chinese would bid big to lock up a coal supply to feed the mighty manufacturing engine at the heart of its export economy.

Now that Solid Energy has been run into the ground along with the coal price, this must have an effect on what it will fetch as the government seeks to hock off half of it. What is the likely impact on the overall returns the public can now expect to get from the partial asset sales programme? Presumably, the Solid Energy debacle can only make the already poor financial logic of the asset selldown look even worse. It was already near the back of the sales queue.

Should we be hocking off Solid Energy at all, at least while coal prices are still relatively low? Or should we be shelving the sale, at least until China’s economy rebounds, and the price of coal rises, lifting Solid Energy’s boat once again in the process? At the moment, New Zealanders are faced with the worst of both worlds – a state energy company mismanaged at the operational level, and a government that seems to have no interest ( or ability) in governing its assets in the country’s long term interests.

Deliberately or otherwise, the government has run down Solid Energy’s likely market price. It seems hellbent on offloading these assets, irrespective of whether it is a good time to sell, let alone whether the selldown makes basic economic sense in the first place. And it appears to be blaming everyone but itself for this situation.

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Content Sourced from scoop.co.nz
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    1. 4 Responses to “On the Solid Energy debacle”

    2. By jackp on Mar 15, 2013 | Reply

      This is a typical Wall Street tactic. Suck as much money out of the company then declare bankruptcy. Romney did it with K&B toys. I don’t know what assets are left in unSolid Energy, but this is a Wall Street tactic and guess who is running the country, John Key, a Wall Street Merrill Lynch ex executive. Together with the Hillside sale and the 800 million going off to China, and now Solid Energy, Key has cost we the taxpayer over a billion dollars on only two major blunders. We are now witnessing why the Global Financial Crises. Key is purposely putting us into more debt then he will walk away and get a cushy job from Goldman and Sachs. Horrifying, really. This goes beyond partisanship, it is borderline treason.

    3. By Rob on Mar 15, 2013 | Reply

      You make some very interesting observations
      I wonder if those involved in companies like Solid energy and organisations
      Such as treasury take notice of the Baltic dry index
      It does give a guide to the transportation by sea commodities such as
      coal and other goods
      It reached its highest point in 2007/08 and dramatically dropped
      To bounce along since . It had a dramatic fall in Jan 2011 and again
      in Jan 2012
      It measures shipping builds and at present there are no orders
      We are in a world recession till trade starts again

    4. By donna on Mar 15, 2013 | Reply

      Thanks once again, Gordon, for being the antidote to the Herald’s Jon Armstrong’s whitewashing of the government’s role in Solid Energy’s demise (it was the perfect storm, you know).
      Interestingly, one of the now jobless miners featured on Campbell Live last night made the point that ‘anyone with quarter of a brain’ knew coal prices were articfially high in 2010 because the open cast coal mines in Queensland had been flooded. Water drains away. Who knew?
      And if all this means we have to put off selling Solid Energy then that’s not without precedent. We tried to flog it off once before and couldn’t. Maybe we should just keep it and run it properly instead.

    5. By cyclist on Mar 18, 2013 | Reply

      Isn’t’ the solid energy saga at least in part an illustration of the huge strategic problems that state owned businesses hold at heart; They are set their direction in accordance with their master of their day, and when the winds change, then they are stranded. At least a part of the company’s woes simply reflect that they set sail under a government that had environmental sustainability as a core value, and then got told their role was simply to pump cash through to the government…?

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