Blog

Zerif supports a custom frontpage

Ski operators snug with sky-high prices

FANCY a nice carton of hot chips for $11.50? How about a $5 cappuccino, after you’ve forked out $110 for a ski pass for the day and queued for half an hour to get on a chairlift?
Nanjing Night Net

Welcome to Thredbo, Australia’s most exclusive ski resort where the prices make Toorak and Double Bay look like a $2 shop. We stand to be corrected on this but the Australian ski fields are quite possibly the most expensive places in the world, and not just ski places, but places full stop.

You won’t pay $100 a day for a lift ticket in Aspen, Zermatt or Chamonix – or $17.70 for a second-rate chicken burger and Coke at Whistler. But that’s what you’ll pay at the cafeteria at Blue Cow in Perisher.

Victorians are slightly better served on prices, although day tickets at Falls Creek and mounts Hotham and Buller still hover around $100. But at Thredders, they take the cake. This is where the elite of Sydney come to play, and pay, pay for the pleasure of going up Crackenback on a 30-year-old chairlift verging on the rickety.

And they joke about it, happily whining about the old T-bar at Antons. Any self-respecting resort in Europe or the US boasts a capsule on their chairs these days, protection from the wind and, of course, cable cars for a nice warm trip up the mountain. None of that here.

Yet they come in their droves. Though this is no miracle of marketing – where second-rate facilities fetch super-premium prices – simply a captive market. Thredbo has the longest, steepest ski runs in the country. It’s a pretty village. And when the snow is good, as it was this week, and the wind dies down, it’s worth the while.

AMALGAMATED Holdings, the company that owns Thredbo, or the resort operator, Kosciuszko Thredbo, to be more precise, reported on Thursday. It showed a profit of $10.7 million, down from $15.17 million the year before.

Last year was not a great season for snow. And while it may not have upgraded the lift system, it does spend a bit on snow-making machines and groomers. The 29 per cent fall in profit before tax was due in part to a 7 per cent decline in the number of skiers, the results commentary said.

Apart from that, the commentary didn’t say much. It never does. And there is precious little financial detail. There have always been sensitivities between Thredbo’s patrician lodge community and the operator.

Besides, Amalgamated is a billion-dollar company that has done quite well in recent years, and the resort accounts for just 10 per cent of profits. Its hotel and cinema operations in Australia and Germany make up the bulk of the business.

One man, Alan Rydge, controls roughly 60 per cent of the stock. Rydge, who doesn’t court publicity, bought Thredbo from Lend Lease for $18 million in 1986 when he was 34. On a cursory poke around the internet we found his corporate headquarters listed simply as ”level 22, Sydney”. Love that.

He renegotiated the 50-year Kosciuszko Thredbo head lease with the state government in 2007. It seems that KT and Amalgamated Holdings had done rather well out of it before that, with leaks to this media outlet in 2004 indicating the resort had been paying National Parks and Wildlife annual rents as low as $8000.

Now that’s a bargain, but as the terms were always secret we can only surmise that it must have been based on a calculation of profits – and it may well have involved infrastructure spending on the part of the operator.

In any case, besides sunlight, the other great threat to Thredbo over the years has been its arch rival, Perisher. Although just up the road, they don’t share ski passes, or sympathies for that matter.

Perisher people tend to regard their nemesis as full of snobs, while the patricians of Thredders often deride Perisher as a bit flat, ugly and overrun with bogans who can’t ski properly. With 48 lifts compared with Thredbo’s 13, Perisher is far larger. It’s also higher, so the snow is often better. And it has really taken it up to its picturesque contender in the past few years, forcing Thredbo to finally counter with a restructuring and a marketing push.

Ironically, the prices are even a tad higher at Perisher, an adult day pass at $112 versus $110 for instance, and it boasts the same sort of extreme prices for very low-quality tucker.

But the move to bring four ski fields together – Perisher, Blue Cow, Smiggins and Guthega – all lift-linked and under one ski pass, has been a good one. Like the Victorian resorts, the lift systems are newer. Skiers have been streaming in. Still, you won’t find much financial detail here, either. It’s owned by the Packer family and housed in a private company. From time to time reports emerge that the resort is up for sale, with price tags ranging from $60 million to $200 million.

With the Packer casino interests humming in the past two years, the rumours seem to have died down.

Last year, Perisher went for the jugular, hitting its rival where it hurts – in the fat ski-pass profit margin – with a half-priced season pass. Thredbo countered with a half-priced deal of its own, and a management overhaul. Former ski champ and long-time general manager Kim Clifford has been replaced and new management is poised to go hard with a summer marketing campaign, perhaps trying to replicate the success the NSW wineries had with the George Benson tour.

Even if the summer marketing push fails, you get the feeling that Thredbo will still produce a good return, as it has all through the financial crisis. A tight rein on costs and the dedicated patronage of the seemingly price-immune, diehard skier should see to that.

This story Administrator ready to work first appeared on Nanjing Night Net.

RBA says boom still blooming

The global price of iron ore has slipped below $US100 a tonne for the first time since late 2009, with experts predicting future falls.THE Reserve Bank has hosed down claims the resource boom is over, saying mining investment will keep rising for up to two years and the economy would even benefit if some projects were scrapped.
Nanjing Night Net

As the price of Australia’s most lucrative export fell to a near three-year low, RBA governor Glenn Stevens said yesterday that miners had billions more to spend.

Despite BHP Billiton shelving its $20 billion Olympic Dam expansion this week, Mr Stevens stood by the Reserve’s forecasts for mining investment to keep climbing towards historic highs of about $145 billion a year, or 9 per cent of gross domestic product.

The prediction came as the global price of iron ore slipped below $US100 a tonne for the first time since late 2009, with experts predicting further falls.

”Looking ahead, the peak of the resource investment boom as share of GDP – the highest such peak in at least a century – will occur within the next year or two,” Mr Stevens said in Canberra.

He also said the economy would be better off if some potential projects did not go ahead. Mining companies already faced rising costs due to fierce competition for staff, he said, and these problems would intensify if too many projects proceeded.

”There are a vast number of [possible projects] which I think in truth really shouldn’t be done, because if they were all attempted, there’s already pressure on the cost side for resources companies,” he told a parliamentary committee. ”You probably just cannot do everything that people have postulated might be done.”

The comments came after Resources Minister Martin Ferguson said the resources boom had peaked. Other ministers sought to retract that claim, instead saying commodity prices had peaked.

This point was underlined by the recent plunge in iron ore. The mineral brought about $US135 a tonne for much of the year, but began slipping seven weeks ago on slowing construction in China and an oversupply of steel there.

On Thursday night it slumped by almost 5 per cent from $US104 to $US99 a tonne, sending chills through the Australian market.

Glyn Lawcock of UBS said he expected further falls. ”Now that it has broken through $US100 a tonne, traders I speak to think the price could get a 7 in front of it,” he said.

Despite this, Mr Stevens said the economy remained healthy and interest rates were unlikely to change barring a sharp deterioration.

He conceded that reports of job losses and the debt crisis in Europe were denting confidence. But he said: ”I begin to wonder whether we in Australia worry about the Greek economy more than the Greeks do.”

This story Administrator ready to work first appeared on Nanjing Night Net.

You know what they say about assuming anything

Assumptions are the mother of all mistakes and here are five. Let’s start with the basics.
Nanjing Night Net

Making money is about predicting share prices.

Not really. Making money is about entering an investment (a stock) with as high a probability of getting the direction right.

You can narrow the odds in a million ways but ultimately the best you can do is narrow the odds of getting it right rather than wrong. The game is about doing your best, not predicting the future and when, a split second after you invest, everything changes, you simply accept it.

There’s no ”mistake”, there is simply an outcome you have to deal with. If you narrow the odds you will win more than you lose and that’s about as good as it gets.

What goes up must come down.

Definitely wrong. What goes up is more likely to keep going up and what goes down is more likely to keep going down. They say the best technical analysts are kids. Show a five-year-old a chart and ask if the stock is going up or down and they will tell you the obvious truth, not concoct some miraculous pivot point out of nothing. The trend is more likely to be your friend which challenges the idea of catching the knife or averaging down. What is more likely – that a stock that falls 10 per cent is going to miraculously turn on a sixpence and go up for ever more, or that it’s more likely that something is wrong and it is going to trend down?

Diversification is good.

The argument for diversification is based on the mathematical truth that if you combine risky assets you reduce overall risk. But the reality is that you also reduce return. If you diversify you are committing yourself to the average return and accepting average market fortunes. Diversification negates the whole idea of the equity market, which is to take more risk to make better returns. You don’t do that by avoiding risk. You do it by embracing it, controlling it and winning at it.

History repeats.

This is one of the weakest tenets of financial research. If you add up the performance of the All Ordinaries index in every month of the year for the past 100 years you will find that there is one month that is statistically the best month of the year and one month that is the worst. But it is just a statistic, it is not a prediction. You were bound to come up with a good month and a bad month. It adds no value at all. It is voodoo. Unless you can explain the reason a statistical phenomenon will repeat, it is of no value. Who cares if the stockmarket goes up in an election year and down in October. What about this year? Some of the ”Sun Spot”-type predictions that lace the stockmarket are simply people with too much time and too much data on their hands. ”Statistically nine out of 10 statements that begin with the word ‘statistically’ are utter rubbish.”

Dividends are good.

Not necessarily. This is a bit complicated but basically return on equity, the amount of money a company makes on the money you give them, is far more important than how much money they give you back. Really good companies should have a yield of zero because it is far better for shareholders to have them keep the money and invest it in the business than return it to you. Why invest the money in the first place if they’re just going to give it back? A high yield also suggests a mature, low-growth company with few growth options to invest in, not the best investments. The dividend decision can also be driven by a lot of factors that do not reflect success. Like the CEO having a lot of shares. Yes, income stocks are in favour in this rather unique income-deprived moment in investment history, but they will not be forever. It is a purple patch. The bottom line is that you need to look at the total return from an investment (capital plus income) not yield. The yield is a distraction, it will distract you from the share price which is far more volatile, far more important and can do you far more damage than a dividend will do you good.

Five more next week.

Marcus Padley is a stockbroker with Patersons Securities and the author of stockmarket newsletter Marcus Today. For a free trial go to marcustoday南京夜网.au. His views do not necessarily reflect the views of Patersons.

This story Administrator ready to work first appeared on Nanjing Night Net.

Today’s Chinese proverb: he who craves wealth joins the party

If the rich keep getting richer at the expense of the poor, China may actually need to go communist.MAYBE China’s Communist Party needs to consider a name change. Two news items this week remind us that there is nothing classless or egalitarian about the political machine ruling the most populous nation: the sentencing of Bo Xilai’s wife, and hints that China’s wealth gap is bigger than anyone thought. Both are more intertwined than meets the eye and show China has a 1 per cent problem that is holding back the other 99 per cent.
Nanjing Night Net

The Bo scandal isn’t often viewed in economic terms. When his wife, Gu Kailai, received a suspended death sentence for killing British businessman Neil Heywood, attention turned to the political fortunes of the former Chongqing party boss. Instead, it should be on the institutional rot that has befallen the party and the precarious standing of the political system after 10 years under departing President Hu Jintao.

Bo’s tale is symptomatic of the official corruption and how it stymies much-needed economic and political reform. It cast an unsparing spotlight on the obscene wealth amassed by politicians. How did Bo, with his modest government salary and a wife he claims didn’t work, live so well and send his son to such pricey schools in Britain and the United States? How did his wife’s sisters come to control a web of businesses valued at more than $US126 million ($A120 million)

The problem is, politics is proving to be an extremely lucrative field. The Communist Party is the largest political party in the world, claiming some 80 million members. At its core is the 25-member Politburo that includes the all-powerful Politburo Standing Committee. Corruption may not taint every member of the inner circle. Yet the financial empires being amassed by some and the lack of transparency about wealth require attention and, even, legal action.

US politicians are paupers in comparison. Earlier this year, an eye-popping figure was revealed in the Hurun Report, which tracks China’s wealth. The wealthiest 70 members of China’s legislature added almost $US90 billion to their bank accounts in 2011. That increase is greater than the combined net worth of all 535 members of the US Congress, the President and his cabinet and the nine Supreme Court justices. Why start a technology company, study science or work in finance when the riches are to be found by rising within the party?

As more and more politicians get rich through questionable land grabs, insider trading and old-fashioned rent-seeking, there is less incentive to retool the economy. Political will shrinks as overseas bank accounts swell. All that money conspires to widen China’s rich-poor divide.

Bo was ousted from his post in March. Yet here’s a twist: just weeks before, he warned that China’s wealth gap had reached the danger zone. He was right. On August 21, we learnt that the wealth gap in rural China approached a United Nations warning level for social unrest.

China’s rural Gini coefficient was 0.3949, slightly less than the UN’s 0.4 warning level last year, the Xinhua News Agency said, citing a survey by Central China Normal University. A reading of zero suggests equality of income distribution. The further you move towards one, the closer you are to complete inequality. As economic indicators go, this is a bad one for Hu as he steps down.

Hu’s decade in power has delivered rapid growth, but few of the reforms needed to elevate the masses from subsistence wages. China hasn’t figured out how to be more than a one-trick economy driven by exports, cheap labor and unsustainable levels of investment. It hasn’t loosened up on internet or media freedoms, raising questions about how a nation innovates while limiting access to Google. It hasn’t devised a strategy to cut pollution. It hasn’t made its leaders more accountable.

To China bulls, the Bo case suggests progress on this last front. Bo committed unspecified economic crimes for which he has been humiliated; his wife was punished, so all is well, they argue. The truth is more complicated, of course. Many believe Bo’s real crime was his ambition. Bo was the closest thing China had to a political rock star and a spoiler for plans to replace Hu with Xi Jinping. Purging Bo, it might be argued, was all about reinforcing discipline and loyalty and maintaining the status quo in a pivotal year.

That is part of the problem, especially as the world economy deteriorates. China is focused on sustaining growth at 8 per cent or more. That seems to mean giving short shrift to recalibrating a lopsided economy. The same could be said of making the political system more responsive to the needs of the 99 per cent.

If the rich keep getting richer at the expense of the poor, China may actually need to go communist.

BLOOMBERG

This story Administrator ready to work first appeared on Nanjing Night Net.

Dick Smith drag on Woolworths profit

WOOLWORTHS has posted its first drop in annual profit since 1999 after triggering a $420 million write-down of its embattled Dick Smith chain, and will turn to a revitalisation of its flagship supermarkets group and the rollout of Masters hardware to drive future earnings growth.
Nanjing Night Net

A final sale of Dick Smith is yet to be clinched but the electronics business is believed to have attracted a shortlist of possible buyers with a deal expected soon.

In the meantime, a decision to write down the asset value of Dick Smith to only $20 million sank the company’s bottom line, forcing Woolworths to post a 14.5 per cent dip in net profit to $1.82 billion and marking the first time it has witnessed a retreat in earnings in 13 years. Dick Smith had already cost Woolworths a $300 million provision for the first half.

However, buoyed by the dominance of its food and liquor offering, as well as its other retail businesses such as Big W, Woolworths recorded a net profit from continuing operations (excluding Dick Smith) of $2.182 billion, up 3.6 per cent. Sales rose 4.8 per cent to $55.5 billion. The profit was slightly below market expectations.

Chief executive Grant O’Brien, who is less than one year in the top job at the retailer, said yesterday a refocus on its earnings engine, supermarkets, would be heralded by $1.3 billion in capital expenditure this year of which the bulk, more than $813 million, would be harnessed to re-establish and extend its leadership in food, packaged groceries and liquor.

The increase in spending on a new supermarket store format for 100 existing sites and the construction of more than 30 new stores this year using the new model marks the biggest investment in its supermarkets in nearly three years, with Mr Grant confident investors will get bang for their buck.

Woolworths has trialled a handful of its new format stores around the country and was pleased with the results, he said.

Mr Grant said the investment wasn’t ”outlandish” and although up significantly on the $614 million spent on supermarkets in 2012, it was still slightly below the $847 million in supermarkets capital expenditure booked in 2010.

”Of the strategic priorities that I put up in November last year, [supermarkets] was No. 1 for a good reason and that is because I recognise the capacity that business has got for improvement, there is a lot of upside available.”

New stores and refurbishments, as well as improved marketing and better value to entice shoppers, would also help drive profits with Woolworths expecting the division to fuel group profit growth of 3 per cent to 6 per cent in 2012-13.

He said Woolworths could once again return to its historic growth record of double-digit profit expansion as it faced a tough economic climate and a resurgent competitor in Coles.”That’s our ambition. That’s how we are attacking this business … we believe we can control our own destiny and be clever enough as retailers to provide reasons for customers to buy.”

Elsewhere in the group, a further $124 million in capex would be devoted to its hardware business Masters this year. Mr O’Brien said that division should emerge profitable in 2013-14 after swallowing about $100 million in costs the year before last and $80 million in costs last financial year. Woolworths declared a final dividend of 67¢ a share payable on October 12.

This story Administrator ready to work first appeared on Nanjing Night Net.

Cards turn on Tinkler the gambler

HE HAS built an unparalleled reputation as the man who could pull off the most unlikely of business deals. And with it came a fortune.
Nanjing Night Net

But yesterday morning Nathan Tinkler was forced to announce his latest venture – to privatise Whitehaven Coal – was dead in the water.

The market took the news badly. Within minutes of the shares coming off a trading hold at 11am, the stock had slumped more than 18 per cent. By the close, the shares were still down 11 per cent.

For Tinkler – the former electrician who in five years turned a $500,000 loan for a coalmine into a position as the wealthiest Australian under 40 – the numbers were stark.

His Whitehaven shares – worth $1.18 billion in April – are now valued at $657 million. That equates to a losing $4 million a day.

But the situation may be worse for the former billionaire than those numbers indicate. One analyst told BusinessDay that potential equity partners were put off investing in the Whitehaven privatisation for fear they could be caught up in a corporate collapse or bankruptcy.

A spokesman for Tinkler described such suggestions as ”rubbish”, but declined to reveal why he withdrew his bid.

The questions many are raising are how much debt Tinkler is carrying and whether his financiers will call in their loans if the value of his Whitehaven holding – constituting the bulk of his wealth – continues to fall?

BusinessDay believes the combined liabilities in Mr Tinkler’s various private entities could be up to $638 million – owed mainly to Singapore-based Noonday Capital Management, an arm of long-term backers Farallon Capital, but also to GE Capital and Westpac. It is not known how far these loans have been drawn down. Mr Tinkler’s spokesman said his maximum liability was ”a mere fraction” of $638 million.

Tinkler has no fear of debt. In 2007, at the age of 30, he mortgaged everything to scrape together the deposit on the Middlemount coal deposit in Queensland, on-selling within 18 months for $442 million. In 2009 he doubled up and won, buying another coal tenement, Maules Creek, for $480 million from Rio Tinto and on-selling it within six months for $1.2 billion in the float of his private

company Aston Resources. In April, he pulled off his third major deal, engineering a three-way merger between Aston, Whitehaven and his private Boardwalk Resources – at a hefty valuation that stunned investors. In yesterday’s deal, Tinkler was the buyer not the seller but could not come up with the cash.

Tinkler – who recently moved to Singapore – has not just borrowed against his Whitehaven shares. He has also taken loans out against his private jet and land in Hawaii. Even machines on his lavish horseracing and breeding properties are leveraged.

And the recent bad news has not been quarantined to his Whitehaven interest. On Monday it emerged that Tinkler’s racing and breeding empire, Patinack Farm, was in financial straits, having failed to pay workers’ superannuation since last November.

Tinkler had tried and failed to sell the whole operation, including more than a thousand horses for $200 million – a $100 million loss on what he pumped in since 2008.

That failure to offload Patinack is costing Tinkler about $500,000 a week to run Australia’s biggest racing operation..

And on Tuesday, a string of businesses came forward to claim that Patinack and other companies linked to Tinkler owed them money.

On Wednesday, one business analyst likened him to entrepreneurs who built a fortune on the back of a boom, only for it all to end in disaster. According to John Singleton, a friend and former investor in Tinkler’s companies, the comparison to Alan Bond and Christopher Skase is bound to hurt.

”If he has one weakness, it’s that he doesn’t like criticism,” says Singleton. ”Not that any of us do, but I’ve certainly had longer to get used to it than Nathan. That’s why he moved to Singapore.”

But Singleton played down Tinkler’s debt situation. ”He’s had a tough run of it. but he’s astute. He’s a gambler … I’m sure he’ll come through this.”

This story Administrator ready to work first appeared on Nanjing Night Net.

Phase one of the boom may be done. Stand by for phase two

AAARRRGGGHHH. It’s the end of the boom!!!! A stunned nation reeled in horror on Wednesday to ”revelations” that BHP Billiton had canned two of its major expansion projects worth more than $50 billion.
Nanjing Night Net

Various newspapers laughably screamed EXCLUSIVE, claiming they’d been predicting the decision for months, conveniently overlooking the fact that BHP chairman Jac Nasser flagged it back in May at a lunch in front of hundreds of Sydney bizoids.

Even the politicians jumped on board. The Honourable Member for Warringah salivated at the announcement. No, he hadn’t read BHP’s statement. But finally he was vindicated. The carbon tax, he said, had killed Olympic Dam, conveniently overlooking that a carbon tax would make uranium more competitive as a power source. Oh yes. And BHP boss Marius Kloppers explicitly ruled out such an argument. Still, who cares? It makes for terrific headlines.

If you want to identify the real sages in this episode you need look no further than BHP investors. They correctly picked the trend more than a year ago, long before even those running our biggest listed company.

BHP shares, and those of its major rival, Rio Tinto, have been on the slide since April last year. And as each eruption in the eurozone’s meltdown gathered intensity, the bulk commodities suppliers took ever greater hits to their market value as investors dumped the shares.

By October, senior BHP executives were flummoxed. The company, even then, was priced for global recession. But it was selling every scrap of red dirt it could dig out of the Pilbara and load onto a China-bound ship. Commodity prices were at near record highs and capacity was strained to breaking point. It didn’t make sense.

But it made perfect sense for investors. For years, they had been complaining that BHP and Rio Tinto had their sights focused too far into the future. The mega-billion-dollar takeovers and the huge expansion plans would deliver returns to future generations. ”But what about us?” they screamed. We want it now.

That investor revolt, which has been bubbling beneath the surface for more than two years, finally has filtered through to the board and management of our resource giants and is the primary force driving this week’s decision. That and the sudden drop in mineral prices.

Postponing the Olympic Dam expansion and the Port Hedland port facilities will be forever etched in history as a turning point. In a sense, it is. But is it the end of the resources boom? Not on your life. It merely is the end of the first phase of the boom, the investment phase that has caused so much pain to the non-mining sector of the economy as the rampaging Australian dollar has battered manufacturing and service industries.

The second phase is destined to last for decades. That extra mining capacity will result in vastly greater volumes of mineral and energy exports. And even though prices are well down on last year’s peak, historically they are still in the stratosphere.

For months, analysts and economists have been fretting that iron ore prices have dropped below $US120 a tonne. That is likely to cause problems for the higher-cost and more marginal operators, some of whom will be forced to shut down.

But cast your minds back a decade. That very same tonne of red dirt would have fetched just $US12. That’s right, one-10th of the price. And remember that BHP and Rio Tinto were making handsome returns back then on those same West Australian mines they’ve been busy expanding in recent years.

That agitation from shareholders to stop the expansions ultimately will put a floor under commodity prices by reducing estimates of future supplies of key raw materials.

And in the next few months, expect more of these kinds of announcements. Marginal coalmine developments and expansions also will be put on ice. For the global economy is in the midst of a slowdown, a contraction that is likely to last quite a few years as the debt crisis in Europe and America is slowly unwound.

What began as a problem in outlying states such as Greece has moved to the centre of the eurozone. Spain and Italy have been under attack by bond markets. And more worryingly, Germany – the engine room of the European economy – seems to be descending dangerously towards recession.

China has felt the chill winds of the European slowdown. This week there were further warnings that the Chinese slowdown is worsening. The once voracious appetite for Chinese exports has abated. And with Chinese authorities apparently reluctant to embark on a huge stimulus program, the short-term outlook for the miracle economy is less than robust.

America, meanwhile, is breathlessly awaiting a new round of stimulus spending, another round of money printing that ultimately will create greater debt and depress the value of the US dollar.

Farcical it might seem, but Wall Street traders secretly sweat that each new set of numbers on the US economy paints a picture of a nation and an economy in trouble.

Why? A stalling economy improves the chances that the US central bank will flood the economy with stimulus money. And given most of that stimulus is delivered through US bond markets, guess who makes a killing?

The short- to medium-term outlook for the global economy is anything but rosy. But there are some heartening developments. That Europe so far has muddled through – despite the incompetence of its lawmakers, bureaucrats and bankers – is enough to give hope.

A radical restructure of the European Union is inevitable. But whatever form that should take – nations such as Greece departing and other nations pulling closer together – the shock value from such changes has greatly diminished. So, too, have the chances of a huge meltdown of global finance.

Greece already has defaulted once. It was an orderly affair. But its debt position remains unsustainable regardless of what policy action is instituted. A further default or perhaps a eurozone exit could be accommodated.

Until recently, the response from eurozone leaders to contain the crisis has been characterised as ”too little, too late”. But the mood is shifting.

For the most part, Australia has been sheltered from the icy winds blowing through the global economy. Now that China is feeling the chill, we, too, will be affected.

But the Asian region remains an area with enormous growth potential. And Australia is well situated to benefit in the medium to longer term. There is no doubt that things are likely to get worse before they get better. But the fruits of the resources boom have yet to flow fully through the economy.

Don’t let anyone tell you otherwise.

This story Administrator ready to work first appeared on Nanjing Night Net.

Mining fears of Chinese invasion

TONY Abbott was at his pugilistic best as he worked through a tight schedule of meetings on his visit to Beijing last month.
Nanjing Night Net

Shaking hands with Chinese dignitaries with the iron-grip confidence of a man who believes he should be the next prime minister, his eyes bulged and veins popped with the adrenalin of meeting senior officials who will set the course of arguably Australia’s most important trade and diplomatic relationship.

His Chinese counterparts were well briefed on our opinion polls; a more senior than usual line-up of party officials and ministers were summoned to have an audience with the opposition leader. When it came to his keynote speech at the Grand Hyatt in Beijing, Abbott had already raised eyebrows by noting that for all of China’s recent economic strides, its people ”still can’t choose their government”.

But then he moved to the crux of his speech – the emotive issue of sovereign investment. While he welcomed foreign investment in principle, he said, Chinese investment ”is complicated by the prevalence of state-owned enterprises”.

”It would rarely be in Australia’s national interest to allow a foreign government or its agencies to control an Australian business,” Abbott said. ”That’s because we don’t support the nationalisation of business by the Australian government, let alone by a foreign one.”

On his return, Abbott launched a policy discussion paper espousing tighter scrutiny on foreign investment in Australian farmland and agribusinesses – including a national register of foreign-owned land and lower trigger levels requiring Foreign Investment Review Board approval. The review board’s chairman, Brian Wilson, has also weighed in, saying Australian businesses, however they are owned, should be run on a purely commercial basis and ”not as an extension of the policy, political or economic agenda of a foreign government”.

Foreign Minister Bob Carr called Tony Abbott’s remarks in Beijing ”dangerously dumb”, and the official Chinese news agency Xinhua characterised Australia’s foreign investment debate as our ”economic xenophobia” on display.

To say no to Chinese SOEs is to say no, effectively, to China. Of the 116 deals involving China in the past six years, 92 of them were made by 45 state-owned enterprises.

Based on transaction value, 95 per cent of Chinese investment into Australia in the same period came through SOEs, according to a recent joint study by consulting firm KPMG and the University of Sydney.

Chinese SOEs have invested nearly $50 billion in Australia in the past five years, with almost all of it in the sensitive sectors of mining and energy. The acceleration has been marked – total Chinese investment in 2007 was just $1.5 billion. And with our traditional sources of foreign investment, the US and Europe, struggling to pull themselves out of their economic funk, signs are China will continue to provide a larger share of our capital needs.

The investment is also highly concentrated. Just 11 SOEs account for 80 per cent of all Chinese investment stock in Australia.

But what are Chinese SOEs and what is behind their push into Australia? Are SOEs driven purely by commercial interests, or are they merely an extension of the Chinese Communist Party? Should they be viewed as an emerging threat to our security, industry and even sovereignty?

”There’s a fear of SOEs and when I say fear, I mean a fear of their real motive and their modus operandi,” says Jason Chang, the chief executive of EMR Capital, a China-focused private equity investment manager. ”It’s very logical, because when you think about SOEs they’re controlled by one shareholder and that’s the Communist Party.

”It’s different ideology, different language, different culture, so when you think about that, it’s not that easy for a Western nation to understand it quickly.”

The rhetoric of the debate has invariably been black or white. There has been political point-scoring from those keen to feed off fears of ”selling the farm” and negative perceptions surrounding China-backed investment. And yet the defence has largely come from business leaders whose corporate profits depend on, or at least are boosted by, healthy levels of investment from China.

One frequent cheerleader for Chinese investment is ANZ chief executive Mike Smith, who is pursuing an aggressive Asian expansion strategy for his bank, and the internationalisation of the Chinese currency, the yuan.

”What is a state-owned institution? The obvious target here is China,” he says. ”I think you have to look at China and say, of its state-owned institutions, what are truly controlled for the interests of the state or, actually, what are run as businesses that happen to be owned by the state.”

Regardless of the size of the transaction, any investment from a state-owned enterprise automatically triggers a Foreign Investment Review Board review. Where a proposal involves a foreign government or a related entity, the review board must consider whether the investment is commercial in nature or if the investor could be pursuing broader political or strategic objectives that may be contrary to Australia’s national interest.

So with the FIRB rules already providing a safeguard against foreign investment which may be against our national interest, why has there been so much debate?

”There’s this underlying assumption when you read the public commentary that there is a conflict of interest between the national interest and that of the SOE,” Chang says. ”I put to you that they can be highly complementary because we have resources and intellectual property which is what China needs to sustain their growth. And they have … financial capital to assist us in developing what we need.

”Australia was built on foreign capital; now foreign capital is just coming from a different time zone than in the past … [but] the concept is exactly the same.”

Tim Murray, an investment analyst who has been based in Beijing for the past 18 years, said conservative politicians were engaging in cheap political point-scoring.

”At the core of it is actually a racist debate and I think the Liberal Party under John Howard and now Tony Abbott, they’re still following the same sort of course,” he says.

”It’s nothing to do with whether they’re state-owned or not, I think it’s a furphy.”

FOR David Lamont, revealing his occupation often proves a show-stopper at barbecues and other social gatherings.

”I work for a company that’s listed in Hong Kong and 72 per cent-owned by a SOE in China, and people go: ‘Why are you doing that?’

The chief financial officer at Minmetals Resources, which is controlled by China Minmetals Corporation, says the common perception was that he was at the beck and call of his Chinese minders. ”That [is] so far from the truth,” Lamont, a former BHP Billiton and PaperlinX executive, says. ”It’s not as though on day one when Minmetals acquired OZ Minerals there was a [Boeing] 747 that arrived from Beijing and unloaded a whole bunch of people who took over the office.”

He says his experience of China Minmetals’ management style was ”no different to any Western company I’ve worked for”. ”Are they tough in certain instances? Yes. Are they sensible and rational? Yes.”

Minmetals Resources launched a takeover for OZ Minerals in 2009, but was blocked by the Australian government due to concerns over the proximity of the Prominent Hill mine to a military site. But a deal excluding Prominent Hill was approved, and Minmetals retained the management of OZ Minerals, including Lamont and chief executive Andrew Michelmore.

Despite a common perception that Chinese investors are put off by an unwieldy FIRB process, or suspect it as an excuse to single out Chinese investment for exclusion, Lamont says China Minmetals ”is no way perturbed” about needing to go through FIRB for every transaction.

”They don’t sit there and take it as an affront,” he says, pointing to subsequent acquisitions in Havilah Resources and Anvil Mining, and a failed play at Equinox, as evidence that China Minmetals were not rendered gun-shy by perceived regulatory hurdles.

Lamont is keen to emphasise that the Australian operations are run autonomously and that the Chinese parent company has not interfered with where the resources its mines produced would go. But ultimately approval for large projects and acquisitions, as with any state-owned enterprise, needs to be cleared with China’s all-powerful National Development and Reform Commission. ”It’s quite clear that the strategy at its broadest is that China growing the way it is … clearly needs to be able to get exposure into the underlying base metals that we produce,” Lamont says.

SOEs are the leading force in China’s offshore investment push. State-owned enterprises are an important instrument of government policy. The government uses SOEs to facilitate structural change in the Chinese economy, to acquire technology from foreign firms, and to secure raw material sources from beyond China’s borders. As of 2010, SOEs held 2.66 trillion yuan ($402.5 billion) in assets outside mainland China, a 50 per cent increase on the previous year.

China’s total outbound direct investment flow reached $US68.8 billion, or 5.2 per cent, of the world’s total in the same year. Seventy per cent of this outbound investment was made by SOEs, according to official statistics.

But despite promising that the government would not influence the commercial decisions of SOEs when it joined the World Trade Organisation in 2001, China does not appear to be keeping this commitment, according to a report prepared last October for the American government’s US-China Economic and Security Review Commission, which found SOEs were likely to retain a critical role in China’s economic make-up. ”If anything, China is doubling down and giving SOEs a more prominent role in achieving the state’s most important economic goals,” the report, by Capital Trade Inc, says.

The report finds the question as to whether state-owned enterprises are acting on their own or merely as a proxy for the Chinese government is moot: most state-owned enterprises, by definition, are either wholly or majority-owned by the state and therefore their actions must be a de facto proxy for their shareholder’s interest.

The influence the Communist Party and the State-owned Assets Supervision Commission exert over the executives of state-owned enterprises mean they face two possibly conflicting sets of incentives. ”You don’t always understand why they’re doing [things], sometimes its not 100 per cent a financial part of the project, but it could be that the government wants him to do it, so he’ll be rewarded for doing it,” Chang says. ”So there’s this strategic element that is not purely financial. But do we have something to fear? I don’t think so, we just need to understand why they’re doing certain things.”

On the one hand, the entities they control are supposed to be profitable, and they are rewarded accordingly based on financial performance. On the other hand, it is also in their best interests to follow the Chinese government’s central policy guidelines, given their career paths are determined by the party’s Central Organisation Department.

”The tricky thing with understanding state-owned enterprise is the role of the top person, who is a Communist Party appointee,” says Geoff Raby, the former Australian ambassador to China.

One of the biggest controversies in Raby’s time at the helm was when Chinalco was trying to increase its stake in Rio Tinto in early 2009. The Australian government’s decision to block the move and the subsequent Chinese backlash is widely considered the low point in recent Australia-China relations.

”I was saying to Canberra: ‘Sure, this is what a state-owned enterprise is, the party secretary runs the show’,” says Raby, who now runs a private consulting firm and is a non-executive director at Fortescue Metals. ”I know party secretary, chairman Xiao Yaqing, very well, he talks to me and he’s very focused on the business dimensions of Rio.

”So there was a very strong and convincing story and I think I convinced Canberra that this was a class-A firm that behaved and operated like a private sector firm – which I believe it still does.”

In the middle of negotiations, the Communist Party’s Central Organisation Department – a powerful and secretive government organ which decides who does what within the party machine – asked chairman Xiao to resign from Chinalco and appointed him deputy secretary-general of the party’s State Council: its equivalent of the government’s parliamentary cabinet.

”People in Canberra were like: ‘What? He goes from running the world’s second-biggest aluminium corporation to being the deputy secretary-general of the State Council?”’ Raby recalls. ”It’s a case of the left hand and the right hand not knowing what it was doing.

”But it certainly set me back in my attempts to persuade people that this was basically a commercial enterprise.”

Raby says the reform of China’s SOE sector is ”the single most important economic challenge” that China’s new leadership faces because of the inefficiencies the state-owned model brings to its economy.

Former Treasury secretary Ken Henry, now the Prime Minister’s special adviser charged with leading the preparation of the Asian Century white paper, says Australians had a similarly adverse reaction when the Japanese ramped up their investment in Australia in the 1980s. But, he says, it goes back even earlier than that.

”Very few people in Australia seem to know that the Foreign Investment Review Board was set up because of concerns in the community about American investment in Australia,” Henry says.

”That was really the first wave of foreign investment to challenge Australian policymakers … and the history is that we will find a way of bringing ourselves to a position of comfort with a significant level of Chinese investment in Australia.”

Much of the negative sentiment around SOE investment stems from its close ties with the ruling Communist Party government and its authoritarian rule, and its chequered record with human rights, social equity and sovereign disputes in the South China Sea.

But Chang says China’s track record with foreign investment has proven it did not want to assert its authority.

”If government’s involved, [people think] they must have a different motive behind it, but bear in mind what they’re trying to do is preserve China’s growth and prosperity, they’re not there to figure out how to conquer Australia,” Chang says.

But the Capital Trade report says the system in place means that despite the autonomy afforded to SOE executives in most circumstances, it must consider the strategic objectives of the Chinese government. Put differently, it says, as long as SOE executives are beholden to the Communist Party, they will have an incentive to choose state goals over financial goals when the two conflict.

But with much of the developed world in the economic doldrums, signs that Chinese economic growth is slowing, and evidence firming that our historic mining boom is running out of puff, perhaps beggars can’t be choosers.

”In the past, whatever we dug up and put on a boat somebody would pay a higher price for that, and if we dug more they’d still buy it. It’s going backwards now,” Murray says, adding that the power dynamics in the region are shifting. ”Prices are going to fall back and when that situation happens, people will be glad to have any investment they can get and that’s when things will naturally change.

”Maybe then, certain enterprises aren’t so bad any more.”

This story Administrator ready to work first appeared on Nanjing Night Net.

Airports stake for Future Fund

THE Future Fund has swooped on a listed fund manager with plans to take off with a direct stake in several Australian airports. The government-owned investment fund surprised the market yesterday with news it was in talks for all the assets in Australian Infrastructure Fund. The fund, which trades as AIX, owns a minority stake in Perth Airport, Melbourne Airport, three regional Queensland airports, Northern Territory Airports, Hochtief Airport Capital and the M4 motorway in Sydney. Hochtief has a stake in airports in Sydney, Athens, Dusseldorf and Hamburg.
Nanjing Night Net

AIX units jumped to a five-year high of $3.26 before settling to close up 17.4 per cent at $3.11.

The Future Fund has signed a memorandum of understanding to buy all the assets for $2 billion, a premium on the $1.8 billion valuation that AIX puts on its own assets.

AIX chairman Paul Espie said the board had agreed to proceed with the offer.

”Ultimately, AIX would finish up as a cash box and the intention is to distribute that cash to our unit holders on the most efficient basis – tax and other issues considered – and thereafter collapse and wind up the corporate structure of AIX. This will take some months,” he said.

Mr Espie said that AIX might still consider a higher offer, but under the memorandum of understanding it would have to pay certain costs and possibly a break fee.

Unit holders will have pre-emptive rights to increase their stake, leaving the possibility that the Future Fund will get less than 100 per cent.

The Future Fund already owns 16.8 per cent of Australian Pacific Airports Corporation, which runs Melbourne and Launceston airports. The AIX takeover will increase its stake to 43 per cent.

This story Administrator ready to work first appeared on Nanjing Night Net.

A lifeblood lesson for Australian industry

The right medicine: Brian McNamee’s vision drove CSL’s vision worldwide.AT 33, Brian McNamee was chosen to run the Commonwealth Serum Laboratories: a small government enterprise manufacturing plasma, antibiotics, flu vaccines and other medicaments for Australia and its neighbours.
Nanjing Night Net

This week CSL announced its first $US1 billion global profit for 2011-12. It is now Australia’s most successful manufacturing business, and by a long way.

While CSL, too, is being belted by the high dollar – the annual earnings report a ”foreign currency headwind of $A108 million” – its global structure, with manufacturing plants in four countries, its high productivity and premium products have allowed it to withstand those headwinds, and remain highly profitable. (Its $US1 billion profit was achieved on just $US4.6 billion of sales.)

It has been an amazing journey that few would have expected when, in late 1989, then industry minister John Button headhunted the young McNamee to become director of CSL, with the ultimate aim of privatising it to be a flagship for the fledgling Australian pharmaceutical industry.

It is an unusual story, of a most unusual company, in which the cultures of the scientific researcher and the corporate carnivore have merged to create an enterprise that in some ways defies modern fashions, and in other ways anticipated them.

It is now very much a global company, on the verge of becoming one of the world’s top 20 pharmaceutical companies, and with 90 per cent of its revenues coming from outside Australia. Yet it is based in an unpretentious old building on the wrong side of Royal Park, where CSL has been since 1918. Its head office has only about 20 staff.

Its big markets are the US and Europe, with a fast-growing Asian trade. But it is led by an Australian-dominated board, chaired by molecular biologist Professor John Shine, carries out half of its vast research and development activity in Melbourne – with 400 to 500 researchers – and credits Australian research for much of its global revenue.

It is not just McNamee who has been with the company for decades. Most of his senior executive team have been there for decades, in CSL itself, or in the companies it has acquired. McNamee’s main interest is in strategy, and he is happy to delegate and trust his deputies. He habitually uses ”we”, not ”I”, to explain his thinking. For a top 20 company, it sounds remarkably collegial.

”People think we’re scientists bubbling away with test tubes,” he says with self-deprecation. ”But we think we’re also pretty good at business. We’ve been financially conservative, but operationally very bold and aggressive.”

McNamee’s goal, he says, was to create ”a great Australian company”. He’s done that, and after 23 years at the helm, plans to hand over in July 2013 to Paul Perrault, now head of CSL Behring, its Philadelphia-based plasma subsidiary. A doctor by training, McNamee drifted into pharmaceuticals in his 20s while in Germany after a brief try at emulating his brother Paul on the professional tennis circuit. At 27, he was recruited back to Australia by Fauldings, helped Button draft the Factor f pharmaceuticals industry plan, then ran Pacific Biotech before being conscripted to CSL.

From the outset, McNamee set his sights on building a global business, created by specialising, building scale, innovating, exporting – and making strategic takeovers. They began at a small scale before CSL was floated on the stock exchange in 1994, valued at $300 million. It is now valued at about $20 billion.

”Most of Australia’s assets are stressed: small assets, low scale,” he says. ”It’s either get bigger, or get out. You either consolidate, or get consolidated. We elected to be the consolidator.”

CSL developed its expertise in mergers and acquisitions through smaller takeovers before astounding critics in 2000 by taking over a firm roughly its own size, its Swiss counterpart ZLB Bioplasma, at a time when McNamee was fighting testicular cancer. Four years later it followed that up by acquiring a second big target, US-based Aventis Behring. A third ambitious bid, for US rival Talecris, was blocked by US regulators in 2009.

McNamee says CSL succeeded because it was patient, disciplined and had worked out how the merged companies would fit together.

”Most acquisitions fail, in my view, because people overpay. We were very disciplined about what we bid, and we had a very clear idea of how we would add value to it … You only buy a business when they’re suffering; if they’re not suffering, you overpay.

”You have to decide why you are the natural owner of that business. We never wanted to be a big company. We wanted to be a fine company … very good at what it did.”

CSL is now organised into a global supply chain, collecting and processing plasma and manufacturing a range of products. Its plants in Broadmeadows and Parkville supply Australia, Asia and the Pacific. Its factory at Kankakee, near Chicago, produces plasma intermediaries for all CSL plants and supplies North America. Its plants in the Swiss capital Berne and in Marburg in Germany, supply Europe and the rest of the world.

Mergers were only part of McNamee’s game plan. At the outset, he moved to lift productivity sharply by slashing CSL’s staff. He made exports a prime goal. He cut out low-margin products, and – with some exceptions for Australia – narrowed CSL’s product range to those where it could be globally competitive. And he was lucky that the Hawke government was already building a global-scale plasma plant at Broadmeadows.

With Australian local manufacturing under so much pressure from the high dollar, those remain his core strategies. ”You have to set your focus on world markets,” he says. ”We need to focus on being good at a smaller number of activities. We have to be in the premium products end.

”Switzerland and Germany have worked out how to deal with the problems of an overvalued currency, and that’s primarily the problem we face. If the high dollar is here to stay, we need innovative industries and clusters. We’re very fortunate to be in the Parkville area – the (research) networks it created have been very important for us.”

One other thing McNamee firmly believes Australia must learn from Germany and Switzerland is the importance of wage restraint, to remain globally competitive. CSL has just been through an unusually bruising wage negotiation in which its unions used strike action to win wage rises of 3.75 to 4 per cent over each of the next three years.

This was very different from the way its enterprise-based unions in CSL’s Swiss and German plants operate. Germany entered the euro with an overvalued deutschmark, but won back its lost competitiveness with 15 years of wage restraint. Swiss workers have wage restraint ingrained in them. The OECD reports that since 1995, average wages have risen 22 per cent in Germany, 33 per cent in Switzerland – but 107 per cent in Australia.

So far, CSL has been able to cope with a dollar above parity, but McNamee warns that is no longer inevitable: ”If you combine a high dollar with wages growth that sits ahead of the global competition, it’s inevitable that will put many assets at risk – including CSL’s.”

But this time next year, that will be someone else’s problem. Brian McNamee is not sure what he’ll be doing, but at 55, he’s got a lot of life in him.

This story Administrator ready to work first appeared on Nanjing Night Net.