Clive palmer gives us a classic lesson in why markets suck, and why you have to be careful.
So one of the big news items last week was Clive Palmer’s Townsville Nickel refinery going into administration.
It’s looking like a train wreck. 550 workers are set to lose their jobs. 237 have already been sacked and are waiting on their entitlements. The refinery owes over 1500 creditors over $100m, including the ATO, Powerlink and a host of local businesses.
Townsville is a large and diversified economy, but this will sting. Once you include businesses up and down the production chain, you’re talking a pretty substantial hit to the economy. And for a property market that had built a reputation as FIFO capital – a shine which has long since worn off – it’s another stumble.
To top it all off, it looks like they’ll leave the tax-payers of Queensland with a bill for $100m just to clean up the site.
As Townsville Mayor Jenny Hill says, “It’s worse than a Shakespearean tragedy.”
I was curious, so I looked up what a “Shakespearean” tragedy was. You know, as opposed to your garden-variety tragedies. Turns out, the defining feature of a Shakespearean tragedy is that all the main characters die in the end.
I think that assessment is a touch grim, but hey, she’s the local, so who am I to argue?
The question that inevitably comes up when something like this happens is, why did nobody see it coming?
Queensland Nickel isn’t some mum and dad sandwich bar that just had a rough trot. It’s a big company, dealing with big customers, in a global commodity.
But nope, nobody saw it coming.
Well, that’s not exactly true. A global commodities glut lined QNI up for a shirt-front about 3 years ago. QNI was just too big and too slow to get out of the way.
And it’s one of the quirky things about the modern economic system. “Prices” are a good way to coordinate activity. They give people the right signals at the right time.
The thing that prices are not good at is coordinating activity across a large number of players in industries that have long lags between project development and the market.
If you learn one thing about economics this year, this should be it.
And the market for nickel is a classic case in point.
It’s been a classic boom and bust.
The price of nickel (one of the key ingredients in steel production) soared with the China-driven mining boom. It peaked in mid 2014, but has since fallen more than 50%.
And this price fall is the result of a classic demand / supply pincer play. Demand in China started tapering off, just as massive amounts of new supply were coming on line.
Between 2010 and 2014, global nickel production increased about 50%!
But all that supply came on to a market where no one really wanted to buy anymore, and prices tanked.
And this is killing players in the Nickel market, players like QNI. Macquarie Bank estimate that at current prices, 70% of the global nickel industry is cash-flow negative.
How did nobody see this coming? Well, I guess we all bought into the hype of the Great Chinese Urbanisation. Miners especially.
(The other thing to remember is that even if a new project is a flop, some people make a can of money. There’s some perverse incentives there.)
But while projections of future demand might have involved a bit of wishful thinking, the prices in 2014 were very real, and they prompted new nickel mines and refinery’s all over the place.
For the individual nickel mine, it was a great idea. But collectively, for the nickel industry to bring that much supply on line, all at the same time, was totally stupid.
So that brings me back to my point:
“Prices are not good at is coordinating activity across a large number of players in industries that have long lags between project development and the market.”
Now take a look at this chart here:
This is the number of units expected to hit the market in coming years, based on approvals already given.
If that chart doesn’t make your eyes pop, you need glasses.
In 2011, we added 12,000 units to the market in Sydney, Melbourne and Brisbane. In 2017, we’ll be bringing 52,920 to market.
Between 2007 and 2011 we built less than 60,000 units. Between 2012 and 2017, we’ll build close to 200,000.
Why? Where’s the Great Chinese Urbanisation rational? Are we expecting a flood of people to fill these apartments? Is there some massive cloning program I’m not aware of?
It is true that we were probably under-producing before, but we’re talking about a quadrupling of production!
That’s nickel-plated crazy.
And as I’ve talked about before, a lot of these developments seem aimed at foreign investors, with little regard for the local market. Last week, Melbourne mayor complained about “shameful… dog-boxes in the sky” (presumably not on behalf of the apartment marketing agencies), before the city approved another $1bn, Chinese-led, 1800-unit development.
Individually, any one of these inner-city apartment towers might make sense, but collectively we’re talking about a segment that’s heading towards massive over-supply.
Remember that stat about 70% of the nickel industry now being cash-flow negative?
I still don’t think this will rattle the market over-all, but the longer it goes on, and the more Aussies are drawn into the bell of the beast, the greater the risks become.
All I know is that I want to be standing well clear when this thing implodes.
Do you see a shake-out in the apartment sector affecting the wider market?