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YEAR IN REVIEW: White gold emerges triumphant from Fonterra stumbles

Paul McBeth
Wed, 11 Jul 2018

Soaring commodity prices and insatiable Chinese demand for milk powder helped the primary sector emerge largely unscathed from last summer's drought and Fonterra Cooperative Group's series of food scares in 2014.

The year started badly for Fonterra after a Wall Street Journal article questioned the safety of New Zealand milk after traces of DCD, a nitrate inhibitor, were found in some powder milk, arousing fears over food safety in the country's key export commodity.

Chief executive Theo Spierings and the government managed to quell the misgivings fairly quickly, with the DCD levels shown to be markedly lower than standards set in the European Union, posing no risk to humans.

But the dairy exporter was beset with another food scare in August when it quarantined several batches of whey protein concentrate amid fears it was contaminated with a potentially dangerous form of the clostridium bacteria.

Again, the scare proved to be a false alarm, but Fonterra's handling of the issue so close after the DCD issue raised question marks over the dairy group's crisis management, especially as the all-clear was given long after a costly global recall been initiated, accompanied by threats of legal action for damages from Fonterra customer and rival Danone. As a result, and several investigations later, the company has stepped up efforts to manage potential risks.

Those mis-steps failed to stall a remarkable turnaround for the dairy exporter from the worst drought in 70 years, with Chinese demand for New Zealand milk powder driving commodity prices higher, and sending the terms of trade, which measures the quantity of imports the country can buy with a set level of exports, to a 40-year high.

That recovery started to show up in the official statistics, with the economy growing at a 1.4 percent quarterly pace in the September period primarily on the strength of dairying, and farmers are set to receive a record payout at the farmgate for the current season. China also emerged as New Zealand's largest trading partner for the first time in the year to November, supplanting Australia.

The economy had already been buoyed by a resurgent building sector, with the groundwork being laid for a pick-up in construction in Canterbury next year, and as developers try to build as many houses as possible to catch up with a shortage of supply in Auckland and Christchurch.

Robin Clements, economist at UBS New Zealand, says 2014 will show the biggest economic growth in a decade, with an expanding construction sector likely to spill-over into increased manufacturing activity and consumer spending.

"The business sector is going to go into 2014 with confidence at its highest level since the early 90s," Clements said. "The moons are aligning."

A resurgent property market, driven largely by a lack of housing supply in Auckland and Christchurch, attracted attention as the government considered ways to make housing more affordable and the Reserve Bank experimented with new ways to stop rising property prices from fuelling inflation.

From Oct 1, central bank governor Graeme Wheeler implemented restrictions on the level of new low-equity loans banks can write, rather than lifting interest rates which could have spurred foreign investors to push an already elevated New Zealand dollar even higher.

The commercial banks hated the measure and complained the central bank was using tools intended to improve financial stability to fight inflation, risking policy confusion. They said the same again when Wheeler removed the restrictions in the case of new home builds.

While property values have charged away at an annual pace of 9.2 percent in the latest Quotable Value figures, the NZX 50 index is facing another boom year, up 16 percent so far.

The stock exchange reported record volumes of trading, with the government's flagship partial privatisation programme introducing MightyRiverPower and Meridian Energy to the bourse.

While the performance of those two stocks has been disappointing, a broader array of private companies came to market, including dairy processor Synlait Milk and service station chain Z Energy, to take total equity raisings above $6 billion.

Grant Williamson, a director at Christchurch brokerage Hamilton Hindin Greene, said investors will be disappointed with the government asset sales, though "overall the level of IPO's this year has been very good."

More companies are expected to float in 2014, though Williamson doubts any will be the same size as this year.

"Next year will be more difficult for the market to grow - we'll need to see companies coming through with earnings growth," he said.

Warning signs for shareholders of regulated companies emerged with the electricity sector facing a completely different market structure if the Opposition wins the Treasury benches next year, raising questions over the value the Crown could expect to extract from selling 49 percent of its last wholly owned power company, Genesis Energy, before mid-year as planned.

Similarly, the telecommunications industry was left in a state of disarray after Chorus and the Crown were surprised by the depth of price cuts wanted by the Commerce Commission.

If the stock market was a bright light for some investors, others had a torrid time, with the extent of private investment advisor David Ross' fraud emerging as the year went on.

Ross pleaded guilty to running the country's biggest ever Ponzi scheme, losing up to $115 million of investors' funds in the process, and was sentenced to a record 10 years 10 months jail-term. He has plans to appeal.

Former debenture holders in Hanover Finance were left hanging through the year with the Financial Markets Authority yet to advance its civil case against the directors of the lender. Meantime, those wanting utu against Hanover Finance principals had their hopes dashed in April when the Serious Fraud Office found nothing that met its threshold to pursue a prosecution.

Major company collapses were few and far-between in 2013, with Mainzeal Property & Construction unexpectedly calling in the receivers on Waitangi Day, while the fallout from state-owned coal miner Solid Energy over-playing its global ambitions continued to play out through the year, with an eventual rescue package requiring its private lenders as well as the government to share in a $100 million "hair-cut."

The government came under pressure this year for picking corporate winners, including finalising its deal with SkyCity Entertainment Group to build an Auckland convention centre and the $30 million sweetener to Rio Tinto to keep the Bluff smelter open.

Still, 2013 ended on a high for government largesse in the public's eye when it hiked its incentive for big budget films and landed the next three instalments of James Cameron's Avatar franchise in return.

The Treasury may not have liked such economic impurity, but the pollsters no doubt advised a government seeking re-election next year that it was the kind of announcement to put the icing on the Christmas cake for voters exhibiting their greatest economic optimism since before the global financial crisis.


Paul McBeth
Wed, 11 Jul 2018
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YEAR IN REVIEW: White gold emerges triumphant from Fonterra stumbles