China

Why doesn’t Atlassian lead the charge if it is such a great idea?

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Atlassian Co-Founder Mike Cannon-Brookes (MCB) has put forward a vision that is so compelling for Australia to junk its $70bn coal industry, it is a real wonder why he has not decided to deploy the tech giant’s own capital to seize those obvious riches? He believes coal will be worth zero in 15-25 years. If it is such a dead industry, can he explain why China’s coal-fired power (great infographics here) has grown from 200GW in 2000 to over 900GW today? Or India that has grown from 61GW to 221GW of coal-fired power gen? Why would Adani persevere in the face of 8 years of government and regulatory roadblocks in Queensland if coal wasn’t on the menu for India’s future?

The International Energy Agency (IEA) notes the following on coal,

Coal power generation increased 3% in 2018 (similar to the 2017 increase), and for the first time crossed the 10 000 TWh mark. Coal remains firmly in place as the largest source of power at 38% of overall generation. Growth was mainly in Asia, particularly in China and India.

Note in the following map, yellow and red are levels of intensity and in operation. Grey is that idled or shut down.

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Global wind and solar installations account for about the same as China’s current coal-fired power capacity.

MCB’s idea that we should export the sun and wind is utterly fanciful. The amount of transmission loss over distances in Australia would be massive. Our own energy market operator, AEMO, noted that energy transmission losses for those wind and solar farms located furthest from the main load hubs, in north Queensland, western NSW and some in Victoria could suffer marginal loss factors (MLF) of up to 22%.

To think our closest neighbours – New Zealand, Papua New Guinea & East Timor – are at least 200km away from our extremities. At least 500km to major city centres like Port Moresby. That is assuming our ecomentalist Department of Environment would fast track approval for Cape York and the Daintree Forest to be logged and turned into a wind and solar park to then run some cable to Port Moresby. The problem with MLF is that if Port Moresby demanded 1MW of energy, then it would need to pay for more than it needed to anticipate the MLF which would grow the further the demand was from the main load hubs that could supply it.

To add to the problem, Australia’s ridiculously high power prices would be completely unattractive to the likes of Papua New Guinea. They would be better off ignoring Australia’s transmission and self-supply. That is exactly what it is doing. PNG currently get 30% of its power from hydro, 40% from gas and 24% from oil. Note it has signed a memorandum of agreement to install, you guessed it, a 60MW coal-fired power station in Lae. Energy security is on the menu.

MCB has suggested we set up local manufacturing to harness all of our local resources. Once again, a great idea on paper, but in practice, our prowess in low-cost manufacturing has a terrible track record. The now defunct auto industry is exhibit A on that plan.

As is so often the case for celebrity billionaires, thought bubbles are often free to them but costly to others. Tesla shareholders know that feeling. Who could forget JCB’s retweet of Greta Thunberg at the time of the election, imploring Australians to “not f*ck it up“??

MCB may drive a Tesla and have plans to make Atlassian 100% powered by renewables by 2025 but for the sake of shareholders it best he sticks to his core business unless he plans to divert capital to diversify Atlassian and harness this green future. Perhaps he should put Greta Thunberg on the Atlassian board as an executive director on renewable exports?

Saving the planet starts after her maiden speech.

Many of the 1,000+ Zali Army apparently want to hear Zali Steggall make her maiden speech in parliament. Instead of streaming it, plans are being made to put them on coaches to make the 300km to Canberra and back. So much for the 60% emissions reductions targets. Perhaps she’ll start the clock after the buses arrive back in Sydney. Do as I say, not as I do!

Actually, vote on the political emergency

No surprise to see The Guardian parrot on about a climate emergency. The editorial completely misses out on the political emergency we face. The economic climate is a massive issue facing Australia. When Bill Shorten tells us that he “will change the nation forever” we shouldn’t view that positively. It is probably the honest thing he has said. Labor’s policy suite is the worst possible collection one could assemble to tackle what economic headwinds lie ahead. Our complacency is deeply disconcerting.

First let’s debunk the climate noise in The Guardian.

The math on the climate emergency is simple. Australia contributes 0.0000156% of global carbon emissions. No matter what we do our impact is zip. If we sell it as 560 million tonnes it sounds huge but the percentage term is all that is relevant. Even Dr Finkel, our climate science guru, agrees. What that number means is that Australia could emit 65,000x what it does now in order to get to a 1% global impact. So even if our emissions rise at a diminishing rate with the population, they remain minuscule.

Bill Shorten often tells us the cost of doing nothing on climate change is immeasurable. He’s right, only in that “it is too insignificant” should be the words he’s searching for.

Perhaps the saddest part of the Guardian editorial was to say that the Green New Deal proposed by Alexandria Ocasio Cortez was gaining traction in the US. It has been such a catastrophic failure that she lost an unsolicited vote on the Senate floor 57-0 because Democrats were too embarrassed to show up and support it. Nancy Pelosi dismissed it as a “green dream.” At $97 trillion to implement, no wonder AOC says feelings are more important than facts.

With the 12-year time limit to act before we reach the moving feast known as the tipping point, it gets confusing for climate sceptics. Extinction Rebellion wants things done in only 6 years. The UK House of Commons still can’t get a Brexit deal done inside 3 years but can act instantaneously to call a “climate emergency” after meeting a brainwashed teenager from Sweden. It speaks volumes of the desperation and lack of execution to have to search for political distractions like this.

The ultimate irony in the recent celebration of no coal-fired power in the UK for one week was fossil fuel power substituted all of it – 93% to be exact. Despite the energy market operator telling Brits that zero carbon emissions were possible by 2025 (40% of the current generation capacity is fossil fuel), it forgot that 85% of British homes heat with gas. Presumably, they’d need to pop on down to Dixon’s or Curry’s to buy new electric heaters which would then rely on a grid which will junk 40% of its reliable power…good luck sorting that out without sending prices sky high. Why become beholden to other countries to provide the back-up? It is irrational.

Are people aware that the German electricity regulator noted that 330,000 households (not people) were living in energy poverty? At 2 people per household, that is 1% of the population having their electricity supply cut off because they can’t afford to pay it. That’s what expensive renewables do. If the 330,000 could elect cheap electricity to warm their homes or go without for the sake of the climate, which would they choose? 100% cheap, reliable power. Yet Shorten’s plan can only push more into climate poverty which currently stands at 42,000 homes. This is before the economy has started to tank!

If one looks across Europe, it is no surprise to see the countries with the highest level of fossil fuel power generation (Hungary, Lithuania & Bulgaria) have the lowest electricity prices. Those with more renewables (Denmark, Germany & Belgium), the highest. That is Australia’s experience too. South Australia and Victoria have already revealed their awful track record with going renewable. Why did Coca-Cola and other industries move out of SA after decades? They couldn’t make money with such an unreliable

Ahh, but we must protect our children and grandchildren’s futures. So low have the left’s tactics sunk that using kids as human shields in the fight for climate change wards off conservatives calling out the truth because it is not cool to bully brainwashed kids. We should close all our universities. As the father of two teenagers, CM knows they know everything already so there is little requirement for tertiary education!

The Guardian mentioned, “But in Australia, the Coalition appears deaf to the rising clamour from the electorate [on climate change].” Really?

CM has often held that human consumption patterns dictate true feelings about climate change. Climate alarmist Independent candidate Zali Steggall drives a large SUV and has no solar panels on her roof! Her battleground in the wealthy seat of Warringah is probably 70%+ SUV so slapping a Zali bumper sticker does nothing but add to the hypocrisy.

Why do we ignore IATA forecasts that project air travel will double by 2030? Qantas has the largest carbon offset program in the world yet only 2% elect to pay the self-imposed tax. Isn’t that telling? That is the problem. So many climate alarmists expect others to do the heavy lifting.

SUVs make up 43% of all new car sales in Australia. In 2007 it was 19%. Hardly the activity of a population fretting about rising sea levels. In Warringah, waterfront property sales remain buoyant and any bank that feared waves lapping the rooves of Burran Avenue would not take such portfolio risk, much less an insurance company.

Shorten’s EV plan is such a dud that there is a reason he can’t cost it. Following Norway is great in theory but the costs of installing EV infrastructure is prohibitively expensive. It will be NBN Mark II. Will we spend millions to trench 480V connectors along the Stuart Highway?

Norway state enterprise, Enova, said it would install fast chargers every 50km of 7,500km worth of main road/highway. Australia has 234,820km of highways/main roads. Fast chargers at every 50km like the Norwegians would require a minimum of 4,700 charging stations across Australia. Norway commits to a minimum of 2 fast chargers and 2 standard chargers per station.

The problem is our plan for 570,000 cars per annum is 10x the number of EVs sold in Norway, requiring 10x the infrastructure. That would cost closer to $14bn, or the equivalent of half the education budget.

The Guardian griped that “Scott Morrison’s dismissive response to a UN report finding that the world is sleepwalking towards an extinction crisis, and his parliamentary stunt of fondling a lump of coal”

Well, he might doubt the UN which has been embroiled in more scandals related to climate change than can be counted. Most won’t be aware that an internal UN survey revealed the dismay of unqualified people being asked for input for the sake of diversity and inclusion as opposed to choosing those with proper scientific qualifications. The UN has climbed down from most of its alarmist predictions, often citing no or little confidence of the original scare.

Yet this election is truly about the cost of living, not climate or immigration. The biggest emergency is to prepare for the numbers we can properly set policy against.

We have household debt at a record 180% of GDP. We have had 27 years of untrammelled economic growth. Unfortunately, we have traded ourselves into a position of too much complacency. Our major 4 banks are headed for a lot of trouble. Forget meaningless stress tests. APRA is too busy twiddling its thumbs over climate change compliance. While the Royal Commission may reign in loose lending, a slowing global economy with multiple asset bubbles including houses will come crumbling down. These banks rely 40% on wholesale markets to fund growth. A sharp slowdown will mean a weaker dollar which will only exacerbate the problem.

We have yet to see bond markets price risk correctly. Our banks are horribly exposed. They have too little equity and a mortgage debt problem that dwarfs Japan in the late 1980s. Part/whole nationalization is a reality. The leverage is worse than US banks at the time of the Lehman collapse.

We have yet to see 10% unemployment rates. We managed to escape GFC with a peak of 6% but this time we don’t have a buoyant China to rescue us. Consumers are tapped out and any upward pressure on rates (to account for risk) will pop the housing bubble. Not to worry, Shadow Treasurer Chris Bowen assures people not to panic if their home falls into negative equity! This is the level of economic nous on the catastrophe that awaits. It is insanely out of touch.

Are our politicians aware that the US has to refinance US$8.4 trillion in US Treasuries in the next 3 years? That amount of money will crowd out a corporate bond market which has more than 50% of companies rated BBB or less. This will be compounded by the sharp rise in inventories we are witnessing on top of the sharp slowdown in trade (that isn’t just related to the trade war) which is at GFC lows. The 3.2% US economic growth last quarter was dominated by “intellectual property”, not consumption or durable goods.

China car sales have been on a steep double-digit decline trajectory for the last 9 months. China smartphone shipments dwindle at 6 year lows. In just the first four months of 2019, Chinese companies defaulted on $5.8 billion of domestic bonds, c.3.4x the total for the same period of 2018. The pace is over triple that of 2016.

Europe is in the dumps. Germany has had some of the worst industrial production numbers since 2008. German GDP is set to hit 0.5% for 2019. France 1.25% and Italy 0.25%. Note that in 2007, there were 78mn Europeans living in poverty. In the following decade, it hit 118mn or 23.5% of the population.

Global bellwether Parker Hannifin, which is one of the best lead indicators of global industrial growth, reported weaker orders and a soft outlook which suggests the outlook for global growth is not promising.

This election on Saturday is a choice between the lesser of two evils. The LNP has hardly made a strong case for reelection given the shambolic leadership changes. Take it to the bank that neither will be able to achieve surpluses with the backdrop we are headed into. Yet when it comes to economic stewardship, it is clear Labor are out of their depth in this election. Costings are wildly inaccurate but they are based on optimistic growth scenarios that simply don’t exist. We cannot tax our way to prosperity when global growth dives.

Hiking taxes, robbing self-managed super fund retirees and slamming the property market might play well with the classes of envy but they will be the biggest victims of any slowdown. Australia has run out of runway to keep economic growth on a positive footing.

We will do well to learn from our arrogance which has spurned foreign investment like Adani. We miscalculate the damage done to the national brand. Adani has been 8 years in the making. We have tied the deal up in so much onerous red tape, that we have done nothing more than treating our foreign investors with contempt. Those memories will not be forgotten.

There will come a point in years to come where we end up begging for foreigners to invest at home but we will only have ourselves to blame.

The editorial closes with,

However you choose to exercise your democratic decision-making on Saturday, please consider your candidate’s position on climate and the rapidly shrinking timeframe for action. We have endured mindless scare campaigns and half-baked policy for too many decades. We don’t have three more years to waste.

This is the only sensible quote in the entire article. The time for action is rapidly shrinking. However, that only applies to the political and economic climate. One can be absolutely sure that when the slowdown hits, saving the planet will be furthest removed from Aussie voters’ minds.

Drinking the UnKool-Aid

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It appears President Trump has been bullying the US Federal Reserve to drop rates by 1% and get them to reopen the spigots on QE. What he is failing to grasp is that businesses invest because they see a cycle, not because interest rates fall.

Trump tweeted,

China is adding great stimulus to its economy while at the same time keeping interest rates low. Our Federal Reserve has incessantly lifted interest rates, even though inflation is very low, and instituted a very big dose of quantitative tightening. We have the potential to go…up like a rocket if we did some lowering of rates, like one point, and some quantitative easing. Yes, we are doing very well at 3.2% GDP, but with our wonderfully low inflation, we could be setting major records &, at the same time, make our National Debt start to look small!

This is a frightening proposal. Rates are at 2.25~2.50%. Although it masks a more important reality. Can Trump avoid a market calamity ahead of the next election? The real engine of the economy is slowing.

Despite the headline US GDP print of 3.2%, consumer spending and business investment slumped to the lowest levels under his presidency. Business investment spending was dominated by “intellectual capital” (soft) which is a pretty hard metric to put a reliable number next to. Equipment and structures (hard) contribution to business investment was near as makes no difference zero. Personal consumption of durable goods slumped to their lowest reading since 2011. Wholesale inventories (ex-autos/petroleum) surged ahead of sales.

Trump might argue China is adding stimulus. He is right. China’s Aggregate Financing (approximately system Credit growth less government borrowings) jumped 2.860 billion yuan, or $427 billion – during the 31 days of March ($13.8bn/day or $5.0 Trillion annualised (a Japanese GDP)). This was 55% above estimates and a full 80% ahead of March 2018. This pump priming added 8% to the Chinese stock indices but since then the market has been rolling off.

The world does not need more debt to be inflated away to get us out of the current mess we are in. A recession is inevitable. To put it into context, the world, since GFC, has added $140 trillion in debt for a grand total of $20 trillion in global GDP growth. That is right. $7 of debt only got us $1 of GDP. So if the Fed acquiesces President Trump he will probably get even worse metrics.

Then again perhaps we can take the words of a venture capitalist, Chamath Palihapitiya, who said on CNBC that “central banks have created an environment where major downturns and expansions are almost impossible.” It is statements like this that almost guarantee that central banks have lost control. Central banks have one role – ensure that markets maintain “confidence”. Powell’s latest move to cut rates after such a shallow peak tells us that “confidence” is waning. 

You won’t believe how California will help us save the planet this time!

At some point, Californians will end up with a list that tells them what they can do which will be shorter than what they can’t. The Democrat controlled state is banning those single use shampoo and body soap containers. The reason being that too much of this plastic waste ends up where it shouldn’t. So instead of encouraging more sensible disposal, let’s just ban it!

How ironic that at the World Economic Forum of all groups said with regards to plastic,

Many environmental activists are calling for a ban on plastics. However, the very properties that make plastic so dangerous – its durability and long lifespan – also make it a great asset. A material that will not die or be destroyed for five hundred years is valuable. We can reuse it almost endlessly. The problem is not plastic itself. The problem is using it irresponsibly….

…A material that can be constantly recycled is a great help to ecology and the economy, especially when the human population is growing rapidly and our lifestyle demands are increasing exponentially. The solution is not to ban plastic, but to ensure that it is used responsibly and recycled properly.”

Bingo!

Once again leftist governments think more regulation, rather than punishing irresponsibility is the answer.

Like all those who praised the banning of plastic shopping bags as being environmentally ‘woke’ when the facts reveal the opposite. Not to mention that we have to go aisle 7 to substitute the plastic shopping bags for plastic waste bin liners. Maybe our Sulo wheelie bins should be made of cardboard?

CM wrote,

In 2006 the UK Environment Agency did a study on the effectiveness of alternative packaging solutions to HDPE (conventional plastic bags) in terms of lowering environmental impact. It said,

The paper, LDPE, non-woven PP and cotton bags should be reused at least 3, 4, 11 and 131 times respectively to ensure that they have lower [impact] than conventional HDPE carrier bags that are not reused.”

So if conventional biodegradable plastic shopping bags are used to throw out garbage that means 6, 8, 22 and 262 days.

While we’re at it, do people realize that the majority of take away wax-lined coffee cups aren’t recycled even though you can feel good about yourself when disposing of it in the right bin? How many people elect to have their brew poured into a ceramic cup? Look next time – hardly any! The cost to recycle the 500 billion (and rising) coffee cups consumed annually is so astronomical (it is hard to separate the wax that stops the cup disintegrating because of the energy intensity involved to do so) that over 90% end up in landfill. No one talks about that 300 million tons of virgin paper used to make these cups! How many of us give it one thought when we need a shot of caffeine? Right?! Although Starbucks is trialing a 5p latte levy for those that elect to use a paper cup.

All this ban has done has inconvenience people. 60% of mismanaged plastic waste was from East Asia (i.e. China), 11% from South Asia; 9% from sub-Saharan Africa; 8% from MENA; 7% from LatAm; 3% from Europe and 0.9% from North America.

Instead of accepting Americans are 5% of the population and 0.9% of mismanaged plastic waste globally, Californians, at 12% of the US population, would ceteris paribus, be responsible for 0.1% of mismanaged plastic waste! Banning hotel shampoo bottles might lower it to 0.099%?

Way to go California! Your genius knows no bounds! A word of advice. Probably better to focus on the $1 trillion plus unfunded liability in your state pension system.

That sinking feeling?

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We are often told how robust the world economy is. Global trade tends to be a good indicator. Looking at the latest Clarkson’s December 2018 annual review, we can see that the number of shipyards that make the vessels (20,000dwt+) that look after global trade has slid from a peak of 306 in 2009 to 127. Newbuild orders have slid from 2,909 vessels to 708. Wärtsilä is anticipating a gradual recovery in contract new builds as high as 1,200 ships by 2022. Wishful thinking?

According to Clarksons, the global fleet of all types of commercial shipping is 50% larger than it was before the GFC despite the World Trade Organization saying growth in global trade for 2019 is expected to fall 2.9%. The WTO has fingers crossed for 2020. The charts in this WTO report show the sharp slowdown in freight in Q4 2018 and Jan 2019.

Germany’s five leading ship financiers reported outstanding ship-related loans of 59 billion euros at the end of 2016 with an average problem loan ratio of 37%. In recent years they have been busy reducing or selling off shipping portfolios. HSH Nordbank required a 10 billion euro bailout by its 85% owners, federal states Hamburg and Schleswig-Holstein. It ended up being swallowed by private equity and renamed Hamburg Commercial Bank. Nord LB was looking to bail in Bremer LB beyond the 54.8% it already owns. Bremer LB had to write off  €400m of its shipping portfolio.

China has been aggressive, filling the void left by the Germans with high leverage financing to support the longer-term objectives of the Belt & Road Initiative. One wonders whether China plans to spoil the market by squeezing a damaged sector further. It wasn’t so long ago that South Korea’s  Hanjin Shipping went bust.

BTIG reported that ship scrapping in Q1 2019 was up 35% to 107,000dwt. Ship owners tend to scrap ships if the cost of idling or operating them exceeds this. Note Capesize shipping rates have fallen to around $9,000/day well below the $25,000 breakeven rate. The bellwether Baltic Dry Index is 27% down year on year and 85% below the peak levels seen in 2009.

The shipping industry has been sick for a decade. The majors have been busy merging, cutting debt and right sizing. Unfortunately it is  still in a pickle. A global slowdown will only exacerbate the issues in the industry.

The one area that looks interesting is the scrubber makers (eg Alfa Laval, Valmet, Fuji Electric). There has been a sharp uptick in growth for retro-fitting pollution equipment to existing ships instead of buying new equipment. Sometimes the best investments come when industries that require massive consolidation hit breaking point.