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  • Offshore investors retreat on profit tax

     

    “The sentiment from them has been not just overwhelmingly negative, they are just baffled,” Mr Schellbach told journalists during a briefing on Thursday.

    “That’s why the traded volumes that we had through them over the last six weeks have dried up. They are staying on the sidelines.

    “Essentially they look at this situation and are thinking ‘whoa, what exactly are you guys trying to do here?’”

    Since May 2, when the government announced the proposed tax on mining companies, the local S&P/ASX200 index has fallen 5.2 per cent.

    At the same time, the S&P500 index on Wall Street has slipped 6.1 per cent and London’s FTSE 100 has backpedalled 5.7 per cent.

    The Shanghai Composite was down 10.5 per cent over the same period.

    Mr Schellbach said the combination of low valuations on equities, combined with the improving cost of corporate debt, may tempt private equity players back to the table in the year ahead.

    He also said potential mega deals, such as the unsuccessful attempt for national flag carrier Qantas Airways Ltd, were unlikely.

    Instead, private equity firms were likely to focus on “pretty boring”, non-cyclical businesses with stable, predictable cashflows and market capitalisation between $1 billion and $2 billion.

    “Because the banks are not as willing to provide funding of the magnitude as was the case three years ago, you are not going to get the front-page type blockbuster deals of buying out $10-$20 billion corporate icons,” Mr Schellbach said.

    Sectors to look out for were healthcare, beverages and consumer stables, he said.

    Private equity firms have made bids for hospital operator Healthscope Ltd and Boom Logistics recently.

  • China’s Wind Industry Is About To Get Squeezed

     

    In addition, all Chinese wind turbine manufacturers (including to a lesser extent the “big three” — Sinovel, Goldwind and Dongqi) rely to varying degrees on technologies that they must acquire from abroad, which puts even greater pressure on their profitability.
     

    The Chinese themselves are increasingly worried about a shakeout in the wind equipment industry as tremendous capacity development has lead to the familiar insidious malady in Chinese industry: invidious competition based primarily on price. The general manager of one wind farm developer described this phenomenon as “collective suicide” among Chinese wind equipment manufacturers, while another wind farm developer said that the price war among Chinese wind equipment manufacturers has left them all “drenched in blood.”   

    Statistics paint a stark picture: in 2004 China had only 6 wind turbine manufacturers; as of the end of 2009 that number had skyrocketed to nearly 90 companies.  Of those 90 companies, 57 already have produced at least one prototype and 30 Chinese wind turbine manufacturers now are producing at the rate of 100 units or more per annum.  In addition to the proliferation of wind turbine manufacturers in China, there are now upwards of 100 wind parts manufacturers operating in China.  China now is home to more than 50 wind turbine blade manufacturers. 

    Almost surely many of these wind industry equipment manufacturers will be caught up in the major shakeout that is on the horizon — repeating a familiar plot line played out in countless other Chinese industries.  An official with Xiang Power Wind Power Co., Ltd. has observed that a large number of wind equipment manufacturers are now losing money and that in the next stage the industry will experience failures on a large scale.  

    Goldwind, one of the “big three” wind turbine manufacturers, also is feeling the pressure from steadily increasing competition. Mr. Wu Gang, the Chairman of the Board of Directors of Goldwind recently referred to the competition as “savage” and worried about what the effects of this “self-destructively pernicious” competition would be on the healthy development of the wind industry.  The competition is so fierce because the low-end segment of the market is over-saturated, which in turn has lead to price competition and falling profitability, which further squeezes companies’ ability to invest in the research and development necessary to move up the value-added chain.  

    In addition, all Chinese wind turbine manufacturers (including to a lesser extent the “big three” — Sinovel, Goldwind and Dongqi) rely to varying degrees on technologies that they must acquire from abroad, which puts even greater pressure on their profitability. 

    Though the increasingly intense price competition in the wind turbine industry is worrisome to Vestas, the international wind turbine manufacturer that has substantial operations in China, because the most intense competition is in low-end products, Vestas has not felt the pressure that smaller Chinese “commodity” wind turbine manufacturers are experiencing.  Rather the international wind turbine manufacturers and the “big three” Chinese wind turbine manufacturers are able to continue to dominate the market for the most technologically advanced products, even as the “commodity” wind turbine market becomes saturated. 

    On the Other Hand Falling Prices Equals More Development

    The flip side of shrinking profitability among Chinese wind equipment manufacturers is the growing enthusiasm among wind farm developers as the cost to develop wind power has declined.  As the price war in the Chinese wind equipment industry has become heated, the price of wind equipment has begun a steep decline.  Based on recent surveys in Inner Mongolia, Liaoning, Hebei and Guangdong, there already has been a 1000 Yuan/kilowatt (kW) decline in the price of wind generating equipment compared with 2008.  

    According to Ma Yugang, the general manager of the Huaneng Tongliao Wind Power Generating Co., Ltd., a China Huaneng Group Company, when the company built the Baolong Wind Farm in 2008, the average construction price per kW for the wind farm was 9250 Yuan/kW.  In 2009, when the company constructed the Zhuri River Wind Farm, the average price per kW for construction had fallen to 9000 Yuan/kW or lower.  As of 2010 Huaneng Tongliao is anticipating building its newest wind farms for an average price per kW near 8000 Yuan/kW. 

    One of the routes Chinese wind equipment manufacturers now are taking to avoid being swept away by this increasingly pernicious tide is to become wind farm developers themselves.

    The tried and true “safety value” for excess capacity development throughout Chinese industry — exports — is quickly becoming a necessary component in the marketing strategy of every Chinese wind equipment manufacturer.  The export market, however, is in its infancy for the Chinese wind equipment industry and it is unlikely that even the largest Chinese wind equipment manufacturers will be more than a statistical asterisk in international markets in the next several years. 

    With wind installations expected to skyrocket through 2010 and beyond, the world’s absorption of wind turbines could be as high as 3 to 4 times the volume of what is already installed in China.  As a result, the Chinese undoubtedly will find a way to become a significant supplier of wind turbines worldwide. Now that the Chinese have commoditized smaller (1.5-MW and below) wind turbines, there is likely to be a flood of those products exported from China.

    Goldwind has ramped up its preparations to break into the North American market by opening a North American office and hiring industry veterans as its general manager and director of sales.   Likewise, Sinovel, which is the world’s third largest manufacturer of wind turbines (based almost exclusively on its sales in China), sold a batch of 1.5-MW wind turbines to India in 2009. Sinovel also continues to source crucial electronics systems from American Superconductor for the 5-MW wind turbines that Sinovel has developed itself.   According to Sinovel’s CEO, these large-scale wind turbines will be the focus of Sinovel’s export strategy. 

    So, as Yogi Berra famously said “it’s déjà vu all over again.”  The Chinese appear to be poised to be the low-cost supplier at the low-tech end of the export market, but continue to rely on Western technology to produce the larger, more sophisticated wind turbines.   Relatively good news for Western suppliers of high technology into the wind industry, but a challenge for Goldwind and Sinovel, who may well find themselves squeezed between the big international players and the Chinese commodity suppliers.  

    For reference, see some of my former articles, “China’s Wind Power Industry: Blowing Past Expectations”, China’s Wind Power Industry: Localizing Equipment Manufacturing, and China’s New Generation: Driving Domestic Development.

    Lou Schwartz, a lawyer and China specialist who focuses his work on the energy and metals sectors in the People’s Republic of China, is a frequent contributor to Renewable Energy World.   Through China Strategies, LLC, Lou provides clients research and analysis, due diligence, merger and acquisition, private equity investment and other support for trade and investment in China’s burgeoning energy and metals industries. Lou earned degrees in East Asian Studies from Michigan and Harvard and a J.D. from George Washington University.  He can be reached at lou@chinastrategiesllc.com.

  • Whitehouse has BP over a barrel as estimate of oil outpouring soars

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    Under US law, BP will be fined for the spill according to the size at the rate of $US1100-$US4300 a barrel.

    The formula suggests that BP’s civil fines have been increasing at the rate of up to $US258 million a day for the past 59 days – and are likely to continue until a relief well can be drilled in August.

    Further billion-dollar penalties will also be incurred for violations of the Clean Water Act and other legislation.

    The figures exclude a $US20bn compensation fund agreed with President Obama for victims of the spill.

    BP had profits of $US17bn last year and sales of $US239bn.

    The company has denied talk of bankruptcy, but yesterday its chief financial officer Byron Grote tried to reassure investors.

    US shareholders have been selling shares in the company, once Britain’s largest, while it was reported that Bank of America Merrill Lynch had ordered its traders not to enter into oil deals with BP extending beyond June 2011.

    On Monday, Fitch, the international ratings agency, downgraded the company’s credit rating by six notches to BB, just two notches shy of junk status.

    BP has also retained Goldman Sachs, Credit Suisse and Blackstone, a restructuring specialist, to help it deal with increasing liabilities.

    Experts said that BP’s chances of surviving – without being forced to sell off assets, limit its liabilities through a partial bankruptcy filing or by accepting a takeover bid – depended on how quickly the chief executive Tony Hayward and the chairman Carl-Henric Svanberg could resolve the crisis.

    BP has promised that a relief well can be drilled by August, allowing for the injection of a cement plug that would stop the leak.

    But some have suggested that this could be optimistic.

    Dan Pickering, the head of research at the energy investor Tudor Pickering Holt in Houston, said that the worst-case scenario would be that the leak continued until Christmas.

    “This process is teaching us to be sceptical of deadlines,” he said.

    One senior lawyer familiar with the company, which celebrated its 100th birthday in 2008, said: “The speed with which this has happened is just extraordinary.”

    He suggested that placing part of the business, BP America Production – the unit responsible for the spill – into bankruptcy would protect the rest of the company, although still carried risks.

    A demerger of its US business to free the rest of the company is another possibility.

    Professor Freeman said that a better option would be to make a deal with Congress that would create legislation to protect it from liabilities.

    However, this would be possible only if BP could stop the leak and the political atmosphere cooled sufficiently to allow it.

    Whatever happens, she added that BP would probably drag out proceedings for as long as possible to spread the impact on the company’s finances.

    “It took 20 years to settle after the Exxon Valdez spill. There could eventually be some large settlement that resolves claims once and for all.”

    But the outlook for BP’s top executives remains difficult.

    One senior source in the oil industry said: “Hayward will have to go and the chairman (Mr Svanberg) will probably have to go too. He was a bad choice because they needed someone with more of an American profile and experience.”

    He said that they were unlikely to resign until the well had been capped.

    Pierre Terzian, director of Petrostrategies based in Paris, said that BP, which was built on a lucrative concession to produce oil in Persia with the backing of Winston Churchill, likened the company’s actions to its colonial past.

    “This was 19th-century behaviour – where the safety of people and the environment were neglected and put ahead of higher profits and production,” he said.

     

  • Is this what politics has come to?

     

    The end result was nothing if not unfiltered. Indeed, it was almost completely incoherent, as Wilde struggled to provide any semblance of moderation and the leaders alternatively answered random tweeted questions or fired campaign pledges into the ether.

    The potential positives for this new style of debate are immediately evident in terms of engagement and participation. Following the #penrithdebate hashtag was like leaping into the warm bath of democracy: raucous and disorderly, but also robust and diverse. Ill-considered quips and confected outrage jostled happily with witty puns and even the occasional balanced and intelligent remark.

    But the disadvantages of such a chaotic medium were just as apparent. Watching the tweets tumble down my screen, I was struck by the sheer avalanche of unmoderated information that Twitter makes available. Even in this age of “partial continuous attention“, the brevity and rapidity of Twitter is exactly the opposite of what one might hope for in an enlightened democratic dialogue. The tendency for candidates to ignore each other and simply to repeat their talking points; the morass of bathetic banter; the trolls and sock puppets: none of these show democratic debate in its best light.

    On the other hand, the same criticisms have been levelled at democratic processes since the time of Pericles. Indeed, one imagines a reanimated Pericles transported into the future would not feel out of place trying to make his points amidst the dull, chaotic roar of a Twitter stream.

    Why participate in the debate anyway, moderator Kevin Wilde asked at the beginning of the debate. “cos KK refused to participate in a debate organised by the Penrith Business Alliance” Barry O’Farrell fired back, in the first of several well-turned tweets.

    What can we draw from this brave exercise? A few key observations offer themselves.

    Firstly, Twitter offers new models for geographically distributed debate. Today’s debate did not require the leaders to assemble in one forum. Keneally was at a Penrith cafe, Rhiannon was at her electoral office, and O’Farrell was on the move. Twitter offers not so much a lack of geography as a multiplicity of geographic simultaneity. Insert your favourite new media metaphor here.

    Secondly, a new medium offers a new challenge for politicians. The first televised US presidential debate in 1960 offered voters a radically new way to engage with their leaders. Listeners on radio thought Nixon won. Television viewers thought Kennedy won. Many blamed Richard Nixon’s five o’clock shadow for the result.

    Today’s Twitter debate offers some intriguing glimpses into a future in which a quick wit and rapid touch typing skills could be just as important as good hair and an appropriately tailored suit. To my surprise, I decided that Barry O’Farrell performed best. His tweets were more direct and even betrayed the occasional flash of humour whereas Keneally seemed capable only of anodyne campaign pledges. Rhiannon seemed most at home in the medium, but also struggled to get a consistent message across.

    Thirdly, the new medium will stimulate a rapid evolution in political tactics appropriate to it. Indeed, we saw a number in their nascent form today. For instance, Keneally showed her political discipline, staying on message with a series of boring — but at least clear and comprehensible — campaign talking points. Another tactic that could emerge is to flood the channel by engaging large numbers of supporters or party members to bombard the Twitter stream on a particular hashtag. Twitter also offers the opportunity for savvy politicians to simply overwhelm the debate with large numbers of tweets; unlike a live TV interview, no-one can say “I’m going to stop you there”.

    It may take audiences and media professionals just as long to understand and adapt to the new medium as politicians. The messy and difficult debate will look a whole lot smoother once it makes the news tonight.

    Perhaps the tweet of the debate was from Daily Telegraph blogger Joe Hildebrand, who observed “Exclusive: Twitter debate confused, nonsensical and unproductive; perfect representation of NSW politics.” It will take more than a few Twitter debates to sort out the mess that is state politics in New South Wales. Genuine democracy is never neat or clear-cut.

  • What went wrong for Kevin Rudd

     

    The title of David Marr’s June Quarterly Essay, Power Trip, points to some answers. Rudd began his maiden speech in federal politics with the words “Politics is about power.” Well, yes and no. Power is complex. It comes in many forms, from coercive power, with its threats and bribes, to the authority to give orders and expect to be obeyed, to the power to persuade people to see a situation as you do and agree with your line of action. And in liberal democracies like Australia, the power of any one political officeholder, even the prime minister, is limited. Marr quotes a shrewd old bureaucrat who has worked with a few prime ministers and wonders if Rudd really understands the way power works at the top. “He isn’t afraid to pick a fight, but doesn’t then behave like a prime minister: he involves himself so much; puts himself on the line so quickly; doesn’t exercise authority by keeping at a distance.”

    This is Rudd of “the buck stops with me,” who presents himself as the fixer of last resort of all the nation’s problems. This is the Rudd who rushed in to take the blame for all the problems of the insulation scheme, and whisked his notebook out of his top pocket to note down the names of worried insulators, reassuring them that there would be another phase of government largesse once the problems were sorted out. Why did he think he had to take all the blame? There were a few other candidates – like shonky small business operators. And no one really expects the PM to act as everyone’s local member, sorting out each person’s problems with this or that government scheme. But having promised something he then found he couldn’t deliver, and he only has himself to blame when he walks away and people are angry. There is a failure of judgement here as he promises too much and delivers too little, both in small things like the promise to the insulators and in large policy reversals like the emissions scheme. I am sure we will see a similar pattern in his attempt to fix the blame game in the nation’s hospital system.

    Implicit in these failures of judgement is a fantasy of concentration of power in the office of the PM. Bucks stop – or not – in many places in liberal parliamentary democracies like ours: in particular with individual ministers, with state premiers and, behind the scenes, with senior public servants. Marr shows convincingly that Rudd is driven by a genuine and deeply held commitment to making Australia a decent place for children to grow up in, a commitment forged in the hard years after his father died. Because his father was a tenant farmer, the family lost its home after he died, and he endured two terrible years as a boarder in a Marist College that instilled in him an icy hatred of the school. Rudd’s determination to make Australia a place in which kids didn’t have to suffer like he had was accompanied by a determination to re-make himself from a fussy little kid on the margins of other people’s lives into someone who was both unassailable and at the centre of things – which is where, he thinks, he now is.

    But the problem is that, having got there, his hold on power is slipping faster than anyone could have imagined. He has become, Marr argues, the choke point in the government, just as he was in Goss’s government when he ran the cabinet office. Rudd’s micromanagement and need to be on top of every detail also has to do with owning all the outcomes of government; he treats senior public servants as underlings, patronises caucus, ignores advice and bypasses his ministers, hogging all the big announcements for himself. And, in the judgement of a former staffer, “For all the effort he doesn’t come up with particularly interesting solutions to problems. His policy positions aren’t breakthrough, not particularly new or exciting. After all that work they are dull.”

    Because he thinks power is all about him, he seems unable to give others the space to be creative, which means that he can’t draw on the wisdom of those who are perhaps less clever than he is but have richer life experiences and more understanding of what makes others tick. And he seems to think that all he has to do is to make announcements. Power is also exercised through persuasion, and here he seems to have a major blind spot. As we know, he is very sensitive to voters’ opinions, but seems little interested in that of stakeholders. It is mind-boggling that his government decided to introduce a new mining tax without any prior consultation with the industry. Ambushing Australia’s most powerful industry in an election year is about as smart as Ben Chifley’s taking on the banks. Doesn’t he remember that the Australian Mining Industry Council’s advertising campaign killed the Hawke government’s commitment to national land rights legislation in the 1980s?

    The battle with the miners has erupted since Marr finished his essay, but it is in character with the man Marr presents, a man for whom power is a brittle exercise in control and who has little understanding of the limits of what one person can do, even when he holds the highest office in the land. Perhaps Rudd will read Marr’s essay and learn from it. He does have deep intellectual and emotional reserves. And with an unelectable opposition, we would all be grateful if he showed signs of a maturing political judgement. But the concluding scene does not bode well for such an outcome.

    Marr and Rudd have been chatting and Rudd asks him about the likely argument of the essay. Marr tells him that he is pursing the contradictions of his life, and wonders aloud if his government will go the way of Goss’s. Rudd explodes with controlled fury. It is, says Marr, the most vivid version of Rudd he has yet encountered. “Who is the real Kevin Rudd?” he writes. “He is the man you see when the anger vents. He’s a politician with rage at his core, impatient rage.” Marr’s essay is brilliant: it has all of the sharp observation and unexpected angles, and the lucid, supple prose, that make him such a fine interpreter of Australian political life. •

    Judith Brett is Professor of Politics at La Trobe University.

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  • Teflon and the haters of Rudd

     

    Paradoxically, we see that the same mistake is being made by the neo Rudd-haters as was made by the Howard-haters, who in many cases are one and the same people. The more vitriolic or unreasonable the attacks, the more they work for the Prime Minister, as voters inclined not to like him pause, take stock and decide their misgivings are really not so grave that they need to join the frenzy. Distaste for the attacks soon turns to regard for the victim.

    As Noel Pearson once described it, the Teflon which coated Howard for so long was made from the spit of his opponents. Rudd may soon discover similar Teflon attaching itself to his thick skin.

    But in the upcoming election Teflon will be an equal opportunity protector, since the Opposition Leader, Tony Abbott, has always been the most obvious beneficiary of the Howard-hater effect. In fact he inherited many of Howard’s enemies who, if it is possible, have become even more unhinged in the face of Abbott’s intellectual version of pragmatic social conservatism.

    Abbott has focused attention so astutely on the government’s failings that the spittle has barely had a chance to land on him yet.

    But, as government hard man Anthony Albanese signalled on the ABC’s Lateline on Tuesday night, with his blitzkrieg on Abbott as “a throwback”, “a huge risk to our economy”, “a huge risk to national security”, “the most extreme ideological leader” the Liberal Party has ever had the misfortune of harbouring, it’s clear Labor’s election strategy will be to destroy Abbott personally.

    Labor’s only glimmer of light in fading opinion polls has been that Abbott has not benefited much personally from the Prime Minister’s catastrophic loss of popularity, even though the party he leads is in a competitive position for the first time in three leaders.

    But, just as interpretations of Rudd’s decline have been skewed in favour of a progressive storyline, so too has Abbott’s success. They’re hating Rudd for the wrong reasons – all emissions trading scheme betrayal, not a prosaic cocktail of voter disappointments, from a cigarette tax to electrocution by pink batt, from a $600,000 education revolution canteen to FuelWatch and GroceryChoice, from record numbers of unauthorised boat arrivals to the new mining tax which threatens to kill the goose that lays the golden eggs.

    The line on Abbott’s success, even from some within his own party, is that he is simply the beneficiary of luck and good timing, having arrived at the leadership at the precise moment that Rudd’s fortunes were heading south; further, that his fundamental shortcomings are the reason he has been unable to turn Rudd’s popularity to his own advantage, as if any opposition leader engaging in hand-to-hand combat with a once-popular prime minister has ever emerged unscathed.

    An opposition leader who acts like a statesman and stands above the fray, enlisting henchmen to do the bruising work, may burnish his own reputation, but he doesn’t shift the polls like Abbott has. People expect you to have your own skin in the game.

    But this reluctance to give Abbott credit for the plunge in the government’s fortunes encourages potential challengers such as Joe Hockey and the failed opposition leader Malcolm Turnbull, seen by the Fraser rump of the Liberals as the last hope against conservatism in the conservative party. Their chutzpah is astonishing.

    Thus we have a reinvigorated Turnbull giving a speech at the weekend containing a carefully worded sideswipe at his leader, while ostensibly criticising Rudd over climate change.

    ”Our efforts to deal with climate change have been betrayed by a lack of leadership, a political cowardice, the likes of which I have never seen in my lifetime.” There wouldn’t have been a political junkie in the country who didn’t think he was talking as much about Abbott as Rudd.

    Equally unhelpful to his leader, the former head of Australians for a Constitutional Monarchy, was news at the weekend that Hockey has rekindled the republic debate, for no apparent reason, by beginning talks with the Australian Republican Movement. That’s called wedging yourself.

    With the government bleeding on so many issues, on the eve of what was always going to be a crucial two weeks in Parliament, the weekend contributions of two of the opposition’s most innocent-eyed politicians were self-defeating, to say the least.

    In the case of our Prime Minister and Opposition Leader, if Teflon is the protection they receive from the hatred of their enemies, then mischief by their friends is the Kryptonite that makes them vulnerable.

    devinemiranda@hotmail.com