The Dim-Post

April 3, 2013

Weirdly myopic visionary CEO style leadership

Filed under: Politics — danylmc @ 9:16 am

Stuff reports:

Thousands of South Island jobs hang in the balance after the Government ruled out stepping in to save the Tiwai Pt aluminium smelter.

The smelter’s owner walked away from talks with the Government during the weekend and shunned the “reasonable” offer of a short-term taxpayer-funded subsidy.

The Southland smelter employs more than 700 staff but its loss would impact on more than 3000 jobs in the region.

Mining giant Rio Tinto rejected the Government’s intervention to resolve electricity negotiations at the smelter and will resume discussions with Meridian Energy.

However, Meridian chief executive Mark Binns says he still could not see how the significant gap in negotiations can be bridged.

I have a genuine, Great Gatsby style, life-lesson-my-Father-taught-me anecdote I can deploy here. My dad taught me to play chess (I don’t remember how old I was) and in an early game he got me into a position where I was going to lose either a bishop or a rook. I asked him ‘How do I get out of this?’ and he replied, ‘You can’t. The trick is to see it coming and not to blunder into it.’ Then he took my rook.

The Mixed Ownership Model is the Key government’s signature policy achievement. It’s Key’s big legacy. So it’s weird how little thought has gone into the process. National didn’t seem to see the Maori Council court challenge coming, and it delayed the sale of Mighty River, so they’re now off-loading four power companies onto the market within about eighteen months. They pre-budgeted the sale of Solid Energy even though Treasury was warning them the company was heading for trouble. And they didn’t seem to anticipate the Rio Tinto ultimatum, a completely predictable move by a company consuming 1/7th of the nation’s electricity. So now they either swallow the loss of several thousand jobs in the Deputy PMs electorate and another setback to the cascade of IPOs, or they subsidise a profitable multi-national corporation with taxpayers money to help keep power-prices high.

You’d think that with all Key’s visionary CEO-style leadership qualities we keep hearing about from the Herald et al we’d get a bit more ‘seeing it coming’ and a lot less ‘blundering into it.’

UPDATE: Also, interesting analysis from Tim Hunter:

Rio is a past master at pressuring governments. There were reports last year its Bell Bay aluminium plant in Tasmania was under threat of closure while it was negotiating a new supply contract with Hydro Tasmania. Last June a new 13-year contract was agreed, prompting a local headline “New power deal saves 500 jobs at smelter”.

Last month there was a similar response to a deal agreed with the government of Northern Territory which kept open Rio’s smelter at Gove, employer of 1500 people in a remote corner of Australia east of Darwin.

It appears the price of continued production was the government allowing Rio to access its contracted gas supplies and underwriting the construction of a 600km, A$500m pipeline from Katherine to Nhulunbuy. The overall investment required to convert Gove to gas is about A$1.2b.

Gove, incidentally, mines and processes bauxite into alumina, which in turn is shipped to the likes of Tiwai and Bell Bay for conversion into aluminium. All three sites are part of Rio’s integrated Pacific Aluminium unit, which has been earmarked for sale.

Closure of Tiwai would meanwhile not be quick or cheap. Chalkie hears contractual obligations require a wind-down period of three years and there are substantial remediation costs involved in cleaning up the site.

Financial statements for NZAS include a provision of $228m for rehabilitation and closure – and that’s discounted from 2030. By some estimates NZAS is looking at $400m if it had to close imminently.

34 Comments »

  1. Emperor, clothes, etc.

    Comment by Sacha — April 3, 2013 @ 9:37 am

  2. If only Key had some trusted friend he could call up to come and fix all these problems, like that guy he got for the spy-agency, which worked so well. Oh wait….

    Comment by Bill Engrish — April 3, 2013 @ 9:38 am

  3. What makes you think they didn’t see it coming? It’s been an issue for quite a long time.

    It was always going to be a matter of when Riotinto forced the issue. When they did the govt wasn’t exactly tardy responding.

    Comment by NeilM — April 3, 2013 @ 9:49 am

  4. “You’d think that with all Key’s visionary CEO-style leadership qualities we keep hearing about”

    Isn’t this all the sort of stuff many CEOs would naturally try to do? ie. Identify the country’s not operating in a viable business environment (considering all the inconveniences to operations), locate a niche (eg. building roads) where the country can focus its efforts for profit maximisation and reduced risk without distractions, then attempt to liquify as many left-over obsolete assets as possible (eg. power companies, the endemic natural environment, local democracy), and pay out big dividends to shareholders so they can live in condos in Hawaii.

    It must have been a shock to discover that a company and a government are different things, if it’s happened yet.

    Comment by MikeM — April 3, 2013 @ 10:09 am

  5. There is a fair amount of risk taking and gambling as a money trader. If you are good then the gambles that lost are outweighed by the wins. In this case Mr Key gambled that the smelter question would be resolved or since the contract on 1 January, the issue would be parked off the table. It is probable that in this case there is a loss to the credibility of the Asset Sales (and a loss to the credibility of the major highly competent Key the Negotiator) which would explain why the wooden faced Mr Key being interviewed by John Campbell last night, did his usual avoidance of serious questions.
    The Herald’s avoidance may be in part be because there are many in the industry with vested interest in protecting Key’s reputation and thus the Asset Sales.

    Comment by xianmac — April 3, 2013 @ 10:18 am

  6. I wonder how much of Key’s belief that he can play hardball with Rio Tinto and win comes from him being talked of as the saviour of The Hobbit movies after his negotiations with Warner Brothers? And how much of a soft touch does RT consider Key to be, for the same reason?

    Comment by Ataahua — April 3, 2013 @ 10:28 am

  7. “…So it’s weird how little thought has gone into the process…”

    Unless it is being driven by nothing more than blind market religion and ignorance, in which case blundering about in the dark holding a bible is perfectly understandable.

    Comment by Sanctuary — April 3, 2013 @ 10:44 am

  8. Erudite commentary one and all. I’d like to contribute something to this thread but for the life of me I can’t figure out what it is trying to achive.

    Comment by TransportationDevice A7-98.1 — April 3, 2013 @ 10:51 am

  9. Oh – you’ve gone and added more to this thread than you’ll ever know…

    Comment by Sam — April 3, 2013 @ 11:32 am

  10. Pointing and laughing is a proud and useful tradition.

    Comment by Sacha — April 3, 2013 @ 11:34 am

  11. The Eternal Return, the smelter goes, gets replaced by a server farm. Govt subsidises new cable to US.

    Major one-off industry getting cheap power with govt funded transmission lines. And in 20 years time we’ll get to have the same debate.

    Comment by NeilM — April 3, 2013 @ 11:59 am

  12. Actually, i think the government probably should cut a deal with Rio Tinto. 3000 jobs and 2% of GDP can’t just be sacrificed because economic orthodoxy says subsidised power is a bad idea. Manapouri was built specifically to serve this smelter. If anything, the government ought to be looking at a partnership with Rio Tinto (or any other owner) to modernise the plant for another forty years. At the moment, orthodox neo-liberal economic prescriptions are seeing this country de-industrialise at a shocking rate. The high dollar is a form of slow moving economic theft that is stripping NZ of decent jobs, and we need to preserve and actively encourage industry – dopubly so in regions, where economically some have already dropped into the third world.

    Comment by Sanctuary — April 3, 2013 @ 12:17 pm

  13. If Rio Tinto does bail on the smelter, it would be interesting to see if they actually follow-through properly on their contractual obligations for wind-down, clean-up, etc. They may decide it is more economically rational to just fold the NZ subsidary and walk-away, and then just weather the legal fall-out.

    Comment by RJL — April 3, 2013 @ 12:23 pm

  14. The electricity can be considered renewable as well as non-fossil carbon, and such green credentials should provide an opportunity for premium pricing to alternative users. Aluminium pricing is going to be depressed as it will be replaced by other materials, and new smelting facilities continue to appear in countries prepared to subsidize production.

    The govt should be looking hard at alternative manufacturing, and I’d suggest carbon fibre production ( which already deliberately locates near large, cheap power sources in the USA ) – as CF production facilities require serious quantities of electricity.

    I’m sure there are other options, and the govt should already be identifying possible users and/or partners for new industries. Hopefully not by asking the public to give them ideas- as with the tragic science challenges fiasco, but using some skilled and visionary technologists and beancounters.

    Shipping electricity north to reduce prices is a very bad idea, given the 10 – 15% transmission losses, infrastructure costs, and the need to replace the lost export revenue.

    Comment by Bruce Hamilton — April 3, 2013 @ 12:33 pm

  15. ” i think the government probably should cut a deal with Rio Tinto.”

    Tricky to do, what one would not want to do is cut a deal when Riotinto would have kept it open anyway – without more govt support.

    Of course RT are unlikely to signal their bottom line so there would be a period of bluff calling.

    High stakes, it could be that the govt believes they won’t close the smelter and so will not offer huge govt largess. And it could be RT walk.

    I suppose there must be some level of govt support at which it us no longer in our interests, given that money could go elsewhere.

    Comment by NeilM — April 3, 2013 @ 12:35 pm

  16. @Bruce Hamilton

    To me all the talk about a subsidy is really notional – the government is not being asked to hand over a manila envelope stuffed with g notes, just guarantee a cheap electricity supply from a dam making the greenest and cheapest electricity of all specifically built for the purpose and whose capital cost was long ago paid for. The infrastructure exist for just one purpose – the smelter. If aluminium is no longer viable then it behoves the government to go out there and find another big industrial use for that power in Southland – carbon fibre plants? Sure, now get on your bike government and go find someone to build one at Tiwai point!

    Comment by Sanctuary — April 3, 2013 @ 12:39 pm

  17. I’m not sure why people are arguing this somehow makes a mess of the partial sale.

    These energy companies are long term investments and Might River’s hydro and geothermal assets aren’t going anywhere.

    Comment by NeilM — April 3, 2013 @ 12:57 pm

  18. NeilM, if the energy companies are long term investments why are they being sold?

    Comment by RJL — April 3, 2013 @ 1:11 pm

  19. “…a period of bluff calling.”

    Ha!

    Comment by Gregor W — April 3, 2013 @ 1:54 pm

  20. Poor management, all round. I can’t believe that in 2013, we’re still dragging on with this massive distortion of the New Zealand economy, a foregone investment that returns a fraction of its true worth. And that once again (as in the case of our gas and petroleum resources, sold for a steal), we’re throwing away our energy supply for a small amount of short term return to allow the government to patch over the systematic deficit they’ve created. On account of lowered taxes. On account of the fact that the health/education/welfare/WFF/supperannuation-welfare state is popular, and destroying it is not a vote winner.

    Those who forget history are condemned to repeat it. Over and over again.

    From 2001: The final design, construction and operation of the Manapouri-Tiwai Point electro-industrial complex, coming as it did at the end of some 65 years of government policy formulation, should have been a significant first step away from New Zealand’s economic dependence upon the export of primary produce to the United Kingdom. Instead, the government can be observed hastily and ill-advisedly involving the country in a new form of multi-national dependence within the developing global economy. That the national economic benefits and desirability of the Manapouri-Tiwai Point electro-industrial development remain in doubt makes this topic both a crucial case study and a caution for those considering New Zealand’s economic future.

    Useful commentary on the history of Manapouri/Tiwai Point

    Via Ross Mason, on Public Address.

    Comment by George D — April 3, 2013 @ 2:41 pm

  21. “NeilM, if the energy companies are long term investments why are they being sold?”

    As I understand it part of the argument for the partial sale is that NZers have been reluctant to invest in anything other than housing. And that’s partly due to a lack of good quality NZ investment opportunities.

    Comment by NeilM — April 3, 2013 @ 3:19 pm

  22. There’s a special hell for people who only ever call things ‘predictable’ in hindsight.

    Comment by Hugh — April 3, 2013 @ 3:43 pm

  23. NeilM, selling the power companies isn’t creating a new investment opportunity. It is just transfering the ownership of an existing investment.

    Comment by RJL — April 3, 2013 @ 3:57 pm

  24. I wonder if Rio Tinto are planning on buying shares……

    Comment by Darren — April 3, 2013 @ 4:56 pm

  25. I so love Shon Key’s aspirational vision. It bears all the marks of a very sharp smooth talking Wall Street trader.

    Bugger the consequences. A deal has been made!

    Shon Key does not care about NZ or NZers. He lives in the USA..

    Maybe he aspires to have NZ added as another state of the USA?

    Tiwai and MRP are merely chess pieces in a much bigger game.

    Shame is that no opposition party can muster enough fire power to attack Shon Key (aka “Slippery John” once upon a time).

    Comment by peterlepaysan — April 3, 2013 @ 8:37 pm

  26. It does not matter whether the government is selling the companies or not, the risks and costs associated with the smelter exist regardless.

    If the government tried to subsidise RT with the intention of propping up the wider electricity market, this would be anti competitive and open it up to action from the commerce commission.

    Comment by Swan — April 3, 2013 @ 9:00 pm

  27. There’s a special hell for people who only ever call things ‘predictable’ in hindsight.

    I knew you’d say that.

    Comment by steve — April 3, 2013 @ 10:07 pm

  28. Yes Steve. You say that now in hindsight but when will Mr Key resign? Huh? Huh?

    Comment by xianmac — April 3, 2013 @ 10:12 pm

  29. RJL, power company shares will provide CN alternative to people who might otherwise have invested in property snd will encourage others into the share market and Dow the seeds of further investment in the productive sector.

    That’s the theory.

    It’s been accepted wisdom for awhile that NZ has to have more investment in the productive sector to improve our standard of living but most people have been put off because of the lack of good, low risk investments.

    The power companies fit the bill.

    If they weren’t good investments then it would make no sense the govt having any ownership either.

    Comment by NeilM — April 4, 2013 @ 1:46 am

  30. The argument that the smelter shutdown should mean a shutdown to the partial sale is a bit odd.

    If the smelter closes, whatever the effect on the value of Mighty River that effect will happen whether or not the sale happens. If the sale didn’t occur then a massive drop in the value of those assets would be a massive drop in the government’s assets.

    Which would suggest maybe the govt is better off in another line of business.

    And if Labour really does believe such a loss in value would occur then surely they would be wanting to keep the smelter operating no matter what.

    Comment by NeilM — April 4, 2013 @ 2:11 am

  31. NeilM, absolutely agree that NZ needs more investment in the productive sector. However, buying shares in these power companies is not a new investment in the productive sector, because the power companies already exist.

    The companies do not get any new capital from the share float. What happens to the money that “Mum and Dad investors” spend buying these power company shares? It is not going to be used to build new wind turbines, for example.

    Comment by RJL — April 4, 2013 @ 8:00 am

  32. Please to be making profitable opportunities Mr Key:

    Comment by OECD rank 22 kiwi — April 4, 2013 @ 9:10 am

  33. RJL, yeah they’re not new investments so in that sense the investment pie stays the same.

    But id people invest in the power companies rather than housing then accepted wisdom has it that is better for NZ. And in addition, so the argument goes, this will accustomise small investors to the share market and so stimulating other productive investment.

    That plus NZ super funds having good reason to invest in NZ industry rather than overseas.
    Not saying that that’s a convincing argument but its what I understand one of the arguments to be.

    Comment by NeilM — April 4, 2013 @ 11:29 am

  34. “His legacy is going to be that he’s the one who tried to have a legacy.”

    Comment by Paul Collins — April 6, 2013 @ 10:58 am


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