The real cause for Solid Energy mass redundancies?

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4 September 2012: Citizens of Greymouth, protesting at impending job losses from Solid Energy mines.

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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.”

See:  Solid Energy – Continuous Disclosure

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.

See: Spring Creek mine work suspended

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. “

See: Greymouth counts cost of potential job losses

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.)

See: Solid Energy reports $40m loss on big writedowns

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.”

See:  Commerce Committee 2009/10 financial review questions: Solid Energy New Zealand Ltd

That figure of 18 redundancies is in stark contrast to the 360 redundancies  this year.

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Source

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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.”

See: Anglo American – thermal-coal outlook bright (14 June 2012)

” 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. “

See: Reuters – Output cuts help steady China’s coal prices, outlook (29 August 2012)

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).

See: Solid Energy New Zealand Ltd Results Announcement 2012

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 their 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 – an 18% increase from the previous year.

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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,

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Full story

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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.”

See: Mining job losses unrelated to asset sale: Elder

To which this blogger replies,

1. There has been a downturn in international coal prices, and,
2. Despite that, Solid Energy is profitable and it’s 2012 revenue exceeded last year’s, and,
3. Bill English stated on 21 August that  “We wouldn’t be planning to float it [Solid Energy] any time soon”, and,
4. A week later Solid Energy announced 250 redundancies and the closure of Spring Creek mine and,
5. 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.

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Additional

English: Solid Energy not ready for sale

NZX: Solid Energy responds to very tough market

Solid Energy: Business Sustainability Principles

Good operating performance overtaken by asset writedowns

Hundreds turn out to support Spring Creek workers

Solid Energy reports $40m loss on big writedowns

Outlook for coal market worse than at the bottom of the GFC, Solid Energy says; ‘Reason why full Crown ownership is not suitable’

Index Mundi: Coal, Australian thermal coal Monthly Price – New Zealand Dollar per Metric Ton

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