In both October 2011 and January 2012 ( a year ago) I alluded to the threat of a closure of the Rio Tinto alumina smelter, and the prospect of the smelter closure impacting on the electricity market, and the forthcoming power industry privatisation. It loomed at as a compelling reason for the NZ government not selling the power assets - probably the only reason. But given the market outlook its a big one. On the 23rd March 2013, I gave John Key a third warning. Now, I know this guy reads my blog posts because he seems to respond to everything I say. On this occasion however he showed utter contempt for my advice. So what's the problem? Aside from the adage "Three strikes and your out", the problem is that:
The spectre of the Rio Tinto aluminium smelter closing means that 11% of the nation's electricity consumption is handing over the market. That is a big problem for several reasons:
1. The nation's population growth is flat
2. We are in the midst of a recession
The fundamentals for asset sale otherwise look pretty good; but this disposition will remain the case for the foreseeable future. In fact, there is good reason for expecting a future government to increase immigration, and to perhaps expect more Kiwis to return home. There is also the prospect in 5-10 years to expect some offshore resource development, with all the onshore developments that are associated with energy processing. But that's a long way off. In the near-term, we are looking at 10 years of subdued energy demand. More worrisome for Key is the push for reform of the Resource Management Act, which would reduce the cost of installing new generating capacity. This is less of a concern for large capacity additions; but there might be perceived to be a 'pent-up demand' for mini-generators like private wind farms, solar concentrators, mini- and run-of-river hydro schemes. The wind farms are particularly appealing in NZ, given the falling costs of installation, and growing acceptance.
The implication is that Rio Tinto is effectively using the power privatisation issue to "extort" a concession. The deal looks like this:
1. The government subsidies Rio Tinto in the long term to stay
2. The government takes a hit on the asset sale price
Ultimately, it might not even be the government who pays. The government might be setting up a lot of voters for failure; or will it be its reputation. I suspect the pain will be less if it just accepted the lower return because at least it can say, Kiwis had the opportunity to buy the asset. He can also argue that 'they got the price it was worth'. Well, true 'today'. But who knows what a bit of policy could do in the future?
Notwithstanding the benefits of selling the asset, it makes more sense to retain it for the time being. It would not do Key's reputation any arm by delaying the sale for 5 years. Interest rates will stay low, so whilst the government is getting a 10-12% return on investment, they are only paying 4-5% interest on the public sector debt. In the meantime, they might be able to raise economic activity. In fact, the global economy should start looking a lot more positive by that time.
John, you need to listen more. If I've told you once, I've told you three time. False pride go'eth before a fall. Your prospects for a third term looks pretty bad. Thanks for the legacy! Defer the privatisation. Great ideas have their time. Your timing is wrong.
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The spectre of the Rio Tinto aluminium smelter closing means that 11% of the nation's electricity consumption is handing over the market. That is a big problem for several reasons:
1. The nation's population growth is flat
2. We are in the midst of a recession
The fundamentals for asset sale otherwise look pretty good; but this disposition will remain the case for the foreseeable future. In fact, there is good reason for expecting a future government to increase immigration, and to perhaps expect more Kiwis to return home. There is also the prospect in 5-10 years to expect some offshore resource development, with all the onshore developments that are associated with energy processing. But that's a long way off. In the near-term, we are looking at 10 years of subdued energy demand. More worrisome for Key is the push for reform of the Resource Management Act, which would reduce the cost of installing new generating capacity. This is less of a concern for large capacity additions; but there might be perceived to be a 'pent-up demand' for mini-generators like private wind farms, solar concentrators, mini- and run-of-river hydro schemes. The wind farms are particularly appealing in NZ, given the falling costs of installation, and growing acceptance.
The implication is that Rio Tinto is effectively using the power privatisation issue to "extort" a concession. The deal looks like this:
1. The government subsidies Rio Tinto in the long term to stay
2. The government takes a hit on the asset sale price
Ultimately, it might not even be the government who pays. The government might be setting up a lot of voters for failure; or will it be its reputation. I suspect the pain will be less if it just accepted the lower return because at least it can say, Kiwis had the opportunity to buy the asset. He can also argue that 'they got the price it was worth'. Well, true 'today'. But who knows what a bit of policy could do in the future?
Notwithstanding the benefits of selling the asset, it makes more sense to retain it for the time being. It would not do Key's reputation any arm by delaying the sale for 5 years. Interest rates will stay low, so whilst the government is getting a 10-12% return on investment, they are only paying 4-5% interest on the public sector debt. In the meantime, they might be able to raise economic activity. In fact, the global economy should start looking a lot more positive by that time.
John, you need to listen more. If I've told you once, I've told you three time. False pride go'eth before a fall. Your prospects for a third term looks pretty bad. Thanks for the legacy! Defer the privatisation. Great ideas have their time. Your timing is wrong.
Asian property markets outperforming Japan Foreclosed Guide Philippines Property Guide
Profit from mining with Global Mining Investing eBook
