Monthly Archives: July 2019

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Test ump back to roots

Queanbeyan Cricket Club veterans Col Berry, Mel Johnson and Steve Bailey ahead of the club’s 150th birthday celebrations.He’s stared down Dennis Lillee and always has a laugh with West Indies legend Clive Lloyd.
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But the Queanbeyan cricket club holds a special place in the heart of former Test umpire Mel Johnson.

A who’s who of past players and officials will reunite for the club’s 150th anniversary celebrations this weekend.

Before he officiated in 21 Test matches from 1980-87, Johnson was the captain-coach of Queanbeyan from 1967 to 1970.

It would be the final club he would play for before a freak back injury provided the catalyst to enter the umpiring ranks.

”I bent over to pick up a packet of cigarettes and couldn’t feel anything from my waist down,” Johnson recalled.

”When I got out of hospital the doctors said you can bat, but can’t bowl, can’t move quickly and can’t field, so there wasn’t a lot left.”

After two years out of the game, he quickly rose up the pecking order and became one of the leading umpires in the country during a golden period of Australian cricket featuring Ian and Greg Chappell, Rod Marsh and Dennis Lillee. Johnson said his favourite memories involved mingling with players in a more casual setting to the more sterile environment of the modern game.

”Everyone sat around and had a beer and you got to know the players,” he said.

”The Chappells, Marshes, Lillees … I still have a drink with them whenever they’re in town.

”I think the players these days will leave the game not having any friends.”

More than 230 guests, including former Australian batsman Doug Walters, are expected for Saturday night’s gala dinner at the Queanbeyan cricket club.

That will be followed by a Twenty20 match between the Mark Thornton XI and the Peter Solway XI on Sunday.

But before that, players of the past will be on hand to see if the current crop can defeat Wests/UC in the second day of their Douglas Cup match at Freebody Oval on Saturday.

Queanbeyan will resume at 4-84 in reply to Wests/UC’s 178.

Games in all grades this weekend will support Pink Stumps Day, an initiative of the McGrath Foundation.

SATURDAY

Douglas Cup: Queanbeyan v West’s UC at Freebody No 1, 10am; Eastlake v ANU at Kingston, 11am; Ginninderra v Tuggeranong at Kippax 2, 11am; North Canberra Gungahlin v Weston Creek at Keith Tournier Memorial, 11am.

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Small generators in power struggle

Momentum Energy managing director Nigel Clark is driving the push into the mainland electricity market.ONE of the biggest beneficiaries of the price on carbon, Hydro Tasmania, has dramatically scaled back its ambitions. This follows the federal government’s decision to pave the way for the local carbon market to be integrated with Europe’s, while cutting the floor price.
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This has put it under greater pressure to carve out a large presence in the national electricity market as it seeks to expand beyond its home base.

The national electricity market is steadily moving towards a structure similar to banking, aviation and retail – a couple of dominant players and a rump of small operators fighting over the balance.

Last year, AGL bought the Loy Yang A power station and is a keen bidder for a big part of the New South Wales government’s generation assets that are up for sale. If it succeeds, this will leave energy retailing and generation dominated by Origin Energy, EnergyAustralia (the former TRUenergy) and AGL.

Smaller groups such as Hydro Tasmania, which has about 5 per cent of the national electricity market, will be increasingly exposed to the market power of the bigger companies.

To protect its position, Hydro Tasmania bought retailer Momentum Energy a few years ago for more than $40 million. Other generators such as ERM are also pushing to expand sales.

Momentum generated revenue of more than $500 million in the year to June. This is expected to rise by as much as 50 per cent this financial year, as the company attempts to lift annual revenue to $1 billion by 2014-15.

Mainland sales already make up half of Hydro Tasmania’s revenue, helped by Momentum, as well as sales into the national market via the undersea Basslink cable.

The government’s carbon pricing decision put Hydro Tasmania in the strongest position of any generator nationally, giving it an immediate lift in wholesale prices while – unlike all other generators, barring Snowy Hydro – it does not have to pay a carbon tax.

The shift in market economics has been evidenced by Victoria’s brown coal generators cutting capacity because of weak electricity demand and a poor competitive position.

Hydroelectricity apart, Hydro Tasmania has boosted its exposure to wind energy, which gives it flexibility in supplies if mainland sales exceed its hydro-generation capacity.

As critics lament the reduction in competition, the concentration of the power industry – as generators and retailers merge into so-called ”gentailers” – has helped revive margins, which had fallen steadily in the national electricity market.

”It de-risks our core business – it gives us vertical integration,” says the Hydro Tasmania managing director, Roy Adair, who has previously ran large power groups in Britain, Victoria and Singapore.

”If you’re going to cover your risk, you can’t be long on generation with no retail capability, and similarly you can’t afford, if you’re a retailer, to be always looking for generation to back your load. It is absolutely imperative to have that ‘gentailer’ capability, which does de-risk the business.”

That risk was underscored by AGL when its New Zealand operations collapsed a decade ago after inadequate risk controls left it with hundreds of millions of dollars in losses, forcing it to close shop after just four days of market movements.

Similarly, poor risk assessment on the part of Fred Hilmer effectively destroyed Pacific Power, the former NSW government entity that held all the state’s generation assets.

And putting a price on carbon has fundamentally changed the industry’s dynamics, giving Tasmania the lowest wholesale electricity costs in the national market.

”It enables us to get a degree of certainty for the sales we make across Basslink,” Adair says. ”Once Basslink was constructed in 2006, we naturally had a significant risk [from imports], and [Momentum] has enabled us to address that, and also provide us with the opportunity to establish a brand image for Hydro Tasmania.

”There is no cap on Momentum’s growth. We are Australia’s largest clean energy producer, in terms of the number of gigawatts of energy produced with zero emissions.”

This gives the company flexibility if it needs to cover any part of its electricity market exposure by buying output from thermal generators given that generators using gas have a carbon intensity of 0.45. This is half that of black coal generators in Queensland and NSW, which at 0.9 is still much lower than brown coal at 1.3.

It will be some time before the [zero emissions] position is emulated, Adair says.

The strong dollar has wiped out the cheap energy advantage of local industry, forcing shutdowns that have led to falling power demand. In Tasmania, a few large industrial users account for as much as 40 per cent of Hydro Tasmania’s output, leaving it vulnerable to shutdowns. ”If we lost a major industrial customer, that would be more load to go across the link” to the mainland, Adair says.

But while a price on carbon has handed Hydro Tasmania a clear competitive advantage, the move to link Australia’s carbon price with that of Europe is a threat. Consequently, Hydro Tasmania has slashed forward profit estimates, and the chances of a second link to the mainland have dimmed.

”There is significant uncertainty … as to what will happen to a future carbon price,” Adair says. ”There is certainly significant potential for renewable energy capability in Tasmania. It is a question of whether you can economically transfer that across to the mainland so that you can compete with the prices that pertain in that marketplace to renewable energy sources.”

The greatest uncertainty may come from any change in government, given the Coalition intends to abolish the price on carbon.

Before that, the national electricity market is to be reshaped again with the looming sale of generation assets in NSW and talk of Queensland following suit, and with the pending reorganisation of the Tasmanian power sector.

”The concentration of the market with a limited number of players is one we are keeping a very close eye on because we need the ability to back our load and, in addition to Basslink, we need the ability of other generators apart from those that belong to the big three to be able to do that,” Adair says.

”We’re looking for a liquid market, so obviously our strategy will always look to ensure we have certainty of supply.”

The push into the mainland electricity market is being driven by Momentum’s managing director, Nigel Clark, a former commodity trader, who spent time with TRUenergy before joining Momentum.

”We’ve built a very competitive retail model, ensuring our cost to serve is low, that we are very responsive to the marketplace, that we have a very strong brand image and we’re able to capitalise on the brand value that we have here, particularly the clean energy of our electricity,” he says.

”Some retailers have gone to the wall because they didn’t manage the issue of billing customers promptly. Cash is king and you need to ensure your liquidity is well served, because you have to pay on a regular basis on terms clearly agreed within the national electricity market for generation. And therefore you need to ensure you’ve got

your money coming in to pay those bills.”

The other potential addition to Hydro Tasmania’s armoury is access to gas-fired generation from the Tamar Valley power station near Launceston in northern Tasmania, and in particular any gas supply contracts.

”Dual fuel is an issue we are keeping under review,” Clark says.

For electricity retailers, an offering of gas and electricity is a handy marketing pitch while sustaining margins.

”The issue of dual fuel could be addressed as part of the market review process, and if Tamar Valley came to us there would be appropriate contracts,” Clark says.

The reform process also involves privatising power retailing in Tasmania.

Caution over the carbon price outlook has prompted the Tasmanian government to cut its forecast receipts from Hydro Tasmania to $200.8 million in 2015-16, well below the $257 million it expects to receive in 2014-15.

The company, which generates all its electricity from renewable energy sources – hydro and wind – is one of the prime beneficiaries of putting a price on carbon, which has helped push up wholesale electricity prices and boosted its bottom line.

The carbon price is expected to push Hydro Tasmania’s profit to as high as $289 million in 2013-14, before dropping to $169 million two years later, which makes the push by the group to carve out a significant slice of the mainland electricity market even more imperative.

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Bust of the boom won’t stop sector from growing

‘This boom is actually as much structural as cyclical.’THE biggest thing that worries many people about the resources boom is that word ”boom”. Booms are cyclical, and thus temporary. So it’s not surprising so many people worry about what we’ll be left with when the boom’s over.
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This week, two economists at the Reserve Bank, Vanessa Rayner and James Bishop, published a research paper neatly answering that concern. In short, what we’ll be left with is a very much bigger mining sector.

The trick is that this boom is actually as much structural (lasting) as cyclical. Australia has had commodity booms in the past, and almost all of those were transitory.

From about 2004, the prices of coal and iron ore began rising strongly until they’d taken Australia’s terms of trade – the prices we receive for our exports relative to the prices we pay for our imports – to their most favourable level in 200 years.

The main thing making this price boom so different (apart from it lasting a lot longer) is that it precipitated a second boom: investment in the expansion of existing mines and the building of new mines and natural gas facilities.

Now, the boom in prices ended more than a year ago and it seems the boom in mining investment is close to its peak. That is, the amount of money being spent on expanding our mining production capacity will stop growing each quarter and start declining.

Even so, we’ll still be investing a lot more on mining each quarter than we usually do. So we’re far from reaching the point where our mining production capacity stops expanding.

And that still leaves this play with a third act that’s only just started: a huge increase in our production and export of minerals and energy as we take up the newly expanded capacity.

Thus you see why this ”boom” is as much structural as cyclical. It represents a historic and lasting change in the industry structure of our economy, achieved over a relatively short period.

But just how big is mining after all this expansion? The miners’ critics – particularly the Greens – make it seem the industry is pathetically small, whereas the industry itself tries to exaggerate its size and importance.

The Reserve Bank researchers adopt a wider definition of mining than that used by the Bureau of Statistics, partly because they’re trying to get a more realistic estimate of the size of the part of the economy that’s been the primary beneficiary of the boom and the size of the ”fast lane” of the two-speed economy.

They establish the size of the ”resource extraction sector”, starting with the standard six components: coal, oil and gas, iron ore, non-ferrous metals, non-metallic minerals, and exploration and mining services.

But then they add those industries involved in smelting and refining the minerals before export – iron smelting, oil refining and liquefying of natural gas, and the refining of bauxite to form alumina and the smelting of other non-ferrous metals, including copper, lead and zinc – which the bureau class as part of manufacturing.

According to the researchers’ estimates, in the eight years between 2003-04 and 2011-12, the resource extraction sector’s share of nominal ”gross value-added” (essentially, gross domestic product) grew from less than 7 per cent to 11.5 per cent. Of this 11.5 percentage points, the narrowly defined mining industry accounts for 9.75 points, with the processing and refining part of manufacturing accounting for 1.75 points.

Most of this growth is explained by the higher export prices being received. That’s mainly because the strong growth in the volume of iron ore production to date has been offset by a fall in the production of some other minerals, particularly oil.

Next the researchers estimate the size of ”resource-related activity”. This includes the investment spending on expanding the future production of minerals, as well as the provision of ”intermediate inputs” used in the present production of minerals.

”In other words,” they say, ”it captures activities that are directly connected to resource extraction, such as constructing mines and associated infrastructure, and transporting inputs to, and taking extracted resources away from, mines. It also captures some activities less obviously connected to resource extraction, such as engineering and other professional services (legal and accounting work, for example).”

Over the eight years to 2011-12, this resource-related activity has more than doubled as a share of GDP, from less than 3 per cent to 6.5 per cent. Within that 6.5 percentage points, business services account for 2.25 points, construction for 1.25 points, manufacturing for 1 point and transport for 0.75 points.

Note, this inclusion of the inputs provided to the mining industry isn’t the same thing as the usual shonky attempts to put a figure on an industry’s ”multiplier effect”. For one thing, it takes no account of the effect on other industries of the spending of income earned by mining employees or shareholders. For another, the researchers take care that the inclusion of inputs provided by other industries involves no double counting.

Put the resource extraction sector together with the resource-related activity and you find the size of the ”resource economy” doubled to 18 per cent of GDP over the eight years to 2011-12.

According to the researchers’ estimates, this 18 per cent of total production of goods and services includes well over 16 per cent of manufacturing’s output, 16 per cent of construction activity and 15 per cent of transport activity.

Since 2004-05, this fast-lane ”resource economy” has grown in real terms at an average rate of 7.5 per cent a year, whereas the rest of the economy has grown 2.25 per cent a year – a smaller gap than some imagine.

Because mining is so capital intensive, one way to denigrate it and minimise the significance of its expansion is to note that its share of total employment (as opposed to total production) is a mere 2.3 per cent. But according to the researchers’ estimates, when you include minerals processing with mining proper, its share of total employment rises to 3.25 per cent. And when you add the more labour-intensive resource-related sector, it accounts for about 6.75 per cent of total employment, taking the share of the ”resource economy” to just less than 10 per cent of total employment.

Don’t let anyone tell you the resources boom is no big deal.

Twitter: @1RossGittins

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Murdoch leads turnover tally

RUPERT Murdoch topped the turnovers table this week when he disposed of $39 million of News Corp stock.
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That was the bulk of the $57 million selling tally, which compared with about $2 million spent by directors doing a bit of buying.

Elsewhere, Andrew Abercrombie took some petty change off the table when he sold FlexiGroup shares at near-record levels.

FlexiGroup – a retail point-of-sale finance provider – went public in 2006 at $2 a share and saw its scrip hit $3.21 shortly thereafter.

It was panic stations in 2008 when punters sold the stock down to around 22¢. Those who gritted their teeth and bought are now looking at a share price of $4.10 – a near 20-bagger. Chairman Margaret Jackson collected $810,000 when she also sold.

Elsewhere on the money-lending front, Michael Smith, the ANZ chief, raised $2.9 million, selling shares at $28.41 apiece. The jolly Englishman said he had sold to pay tax.

John Dawkins, a former Labor federal treasurer, more than doubled his stake in Australian Bauxite, where he is chairman.

The company this week completed a $1.6 million placement and says it has the potential to create significant bauxite developments in three states.

John Bevan, chief of Alumina, made a rare appearance on the table, increasing his stake by 70 per cent. Last week, China’s state-owned Citic bought 13 per cent of Alumina and late this week Bevan bought some shares, as did Peter Wasow.

Alumina this week reported a $51 million loss compared with earnings of $124 million previously.

Elsewhere on the results front, Oakton, an IT services group, reported a 30 per cent earnings decline and the shares promptly fell from $1.45 to $1.26. Non-executive director Martin Adams promptly bought about 60,000 shares at $1.27 and is already ahead of the game as the scrip closed the week at $1.34.

The reporter owns AWC shares.

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Kloppers a casualty of a new era of austerity

A SENIOR BHP Billiton executive recounts a story about being ensconced in a meeting at the group’s head office tower in Melbourne when the chief executive, Marius Kloppers, strode in, removed the phone pod used for conference calls from the centre of the round table and put it in a cupboard. The participants were dumbfounded.
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Another staffer recalls Kloppers, who sits atop a staff of 40,000 in 25 countries, swooping down unannounced to tidy up the computer cords behind his desk.

The soon-to-retire head of the world’s largest mining company has a mantra: accountability and simplicity. He has been outed before for the militaristic-like neat freak obsession that trickled down to every layer of the organisation – no eating hot food at the desk and one framed photo per employee.

On May 10, Kloppers will work his last day at the helm of BHP Billiton, cruise home to his suburban home in Melbourne, kick off his black leather slip-ons and place them (neatly) in the assigned cupboard. He will then turn his attention to the Higher School Certificate.

The youngest of his three children is about to face this academic challenge. His contribution to his daughter Gabrielle’s performance may be more about time management than math. ”We manage by policy but not detail,” Kloppers says.

But this week was all about the management of his legacy. Since announcing he would vacate his position as one of the world’s most powerful executives, it’s been back-to-back briefings and meals with with analysts and investors, flanked by his successor, Andrew Mackenzie.

His scorecard has been picked over and compared with peers. His greatest achievements and worst moments have been trawled through. Jaws have hit tables at the $75 million value of his valedictory pay packet.

The one thing Kloppers, who is often described as the smartest person in the room regardless of the size and calibre of the crowd, didn’t have control over was the timing of his departure. He would rather have seen out the year but the board had different ideas. The heady era of the resources boom is over and BHP’s chairman, Jac Nasser, decided now was the time for fresh blood.

During his time Kloppers had attempted $200 billion of acquisitions and billions more investment in new projects. Mackenzie, a Scotsman, is tailor-made for the BHP’s new phase – consolidation, watching the pennies and working the assets harder. Importantly, he has operational experience in energy as well as minerals.

Rarely has the ground been so meticulously prepared for the departure of a chief executive, or a corporate machine worked so hard to prepare the ground for the changing of the guard.

The process began in November with a leak to the Financial Times newspaper, citing headhunter sources, proclaiming with certainty that the search for a successor to Kloppers had begun.

Aghast as the company claimed to be at such a notion, there was no real attempt to deny it. There was equal finger-wagging by the BHP machine at suggestions this could be connected to the company’s $2.84 billion impairment charge in August over its recently acquired shale assets in the US. The board was well prepared for this barrage of criticism. Such was its desire to distance Kloppers from single-handed blame that Nasser took the unusual step of backing him up in a statement, saying he supported the actions of the chief executive and agreed it was the right investment decision for BHP.

The task ahead was to convince investors. In this endeavour there has been mixed success.

Nasser didn’t have to read the tea leaves to know how unpopular the $20 billion shale oil/gas asset was in the eyes of analysts and investors. It was a major factor in Kloppers’ declining score in last year’s Corporate Confidence Index – a confidential ratings report based on views of analysts and investors. The price of the gas these assets contain has experienced a minor improvement but some of BHP’s investors remain sceptical. This has been despite the fact that the media has been warming to the investment, taking the view that it could ultimately change the geopolitical landscape around the world supply of energy.

THE pressure to inject fresh managerial blood only increased towards the end of last year when the prices of its two major products, iron ore and coal, went into a downward spin.

Kloppers, like his peers, had promoted caution and warned of some price moderation. But none had seem the commodities rout coming. The pack had collectively gazed through the same rose-clouded crystal ball.

There has always been an intense rivalry between Australia’s two resource giants, BHP and Rio Tinto. Be it size, performance, the quality of assets, stock prices or shareholder returns, these two are forensically compared. They have now lined up on a new measurement – the replacement of their CEOs.

Kloppers’ resignation, coming hot on the heels of the departure of the Rio boss, Tom Albanese, is not just coincidental.

Nasser denies it had any bearing but fresh governance brings with it the opportunity to reposition priorities around everything from capital expenditure, exploration and balance sheets to dividend policy.

But the unceremonious ousting of Albanese gave Rio a fresh slate, in the same way as the removal of the heads of two other mining majors, Xstrata and Anglo American, had done a few months earlier.

But where Rio and Anglo sold the changes as an opportunity for an overhaul, BHP’s new boss Mackenzie is labelling his task as pursuing the same strategy but with extra vigilance.

The deference in approach between BHP and Rio is chalk and cheese.

Where Albanese was busy packing framed photos of his family in cardboard boxes while the announcement of his removal was being made, Kloppers was presenting the half-year results to the market with Mackenzie at his side.

The company had even produced a video of the outgoing and incoming chief executives together, all smiles and unity.

It was a BHP love-in full of effusive praise for Kloppers, humility from Mackenzie and backing vocals from Nasser.

Of Mackenzie, Kloppers talks personally: ”You showed faith in me … which was beyond anything, and you know I consider you in a very real sense – not just in theory but in practice – the guy I will go to if I’m asking advice for my kids.”

Nasser swooned: ”Under Marius’ leadership we’ve seen BHP grow to one of the most valuable companies in the world, and that isn’t an opinion, it’s there in the results.”

The chief financial officer, Graham Kerr, had the task of presenting the details of the half-year result, which included a 38 per cent fall in earnings before interest and tax, further exacerbated by $2.7 billion of impairments on BHP’s alumina and nickel assets.

CLEARING some of the underperforming assets out of the BHP portfolio at an acceptable price will be Mackenzie’s job.

But where Albanese had been turfed as a result of a $14 billion write-down in its aluminium division and the ill-fated coal purchase in Mozambique, Kloppers’ mistakes were, by comparison, negligible.

It will be years before an informed judgment can be made on BHP’s shale gas punt. The $40 billion attempt to acquire Potash Corp was not considered a cross on Kloppers’ scorecard but the inability to seal the deal attracted some criticism.

Far more controversial was Kloppers’ $147 billion attempt to buy Rio Tinto. ”What a fantastic deal that would have been for the time that it was launched, when I think from memory the iron ore price was about $40 [per tonne]. What a terrible deal that would have been in the global financial crisis. We engineered a way that we would have had a choice, and we exercised that choice,” Kloppers said.

As luck would have it, European competition regulators knocked it back. Kloppers says it was more a case of disarming the gun than dodging the bullet.

His near six-year reign is marked by this aggressive acquisition strategy, which for some of his time was enabled by riding on the wave of record commodity prices, while some was seizing the opportunity provided by a strong balance sheet and struggling competitors to try to add to the company’s stable of large tier one assets.

e world over the past six months has changed and BHP’s strategy has evolved.

Mackenzie and his new counterpart at Rio, Sam Walsh, have a new agenda – a new imperative. It’s not about spending, it’s about saving.

Neither BHP nor Rio talk about acquisitions now. Sam Walsh delivered a homily last week, when releasing Rio’s results, about getting back to basics, accountability and operating like a small business.

While expressed differently, Mackenzie delivered the same message this week. It’s about focused investment on the large established assets and cost reductions.

It’s about bleeding the assets harder and reducing the expenditure and using it more judiciously.

This is the new battle ground.

Exactly which of the BHP’s executives Mackenzie chooses to help him in this task is unknown. There will be a reshuffle and senior roles will go or change. Those in key management roles will be sweating on them over the weekend.

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