Freight Rail, Mark Carter

Brookfield’s risky business

Photo: Port Kembla Coal Terminal

COMMENT: Asciano’s heavy reliance on the slumping coal sector raises the stakes of Brookfield’s recent acquisition move, Mark Carter writes.


Despite rumours for some time that Asciano has been looking for suitors for all or part of its rail, ports and logistics business, the (seemingly successful) bid from infrastructure and asset giant Brookfield still came as a bit from left field, especially given weaknesses in key areas affecting the Asciano business.

Writing for Business Spectator, Alan Kohler suggests paying a 40% premium, and 30 times Asciano’s net profit, is a courageous play for Brookfield.

“For Asciano shareholders, either they are selling at the bottom, or it’s a good time to get out, because trade volumes have not finished falling,” he says.

Kohler suggests, “…Brookfield’s real bet is that the trade downturn is cyclical rather than structural…”

They will certainly be hoping so, as it can be argued that the decline and general stagnation in global trade has been going on for five years now and there are no obvious signs of a recovery.

The latest full year figures released this week for Australia’s two largest rail freight operators, Asciano and Aurizon, show that while profitability is up, traffic volumes are down, subdued or stagnant, depending on which way you choose to read them.

Coal haulage for Asciano’s Pacific National rail division was 162.8 million tonnes, up by just 2.4% on FY2014, while intermodal traffic was down 2.4% at 20.9 billion net tonne kilometres, and steel volumes dropped 1.6% to 2.88 million tonnes.

As a comparison, coal haulage for Aurizon remained virtually static in FY2015 growing by less than a million tonnes on a total of 211.2 million tonnes. Iron ore revenue was down by $40 million, or 14% as the result of the recent loss of two contracts during the year, while intermodal revenue did grow by $10 million to $302 million. The company says underlying market conditions remain subdued.

While Kohler’s comments relate more to container trade and manufacturing, the impact coal could have on the success of the investment is also worth considering.

There is no doubt coal remains fundamental to the success of much of the rail haulage industry in Australia. If we look at Brookfield’s ‘bet’ on Pacific National it is worth considering the role that coal plays in Asciano’s figures.

With revenues of $2.24 billion, Pacific National’s rail business accounts for 62.6% of Asciano’s total, and 72.1% of earnings before interest, tax, depreciation and amortisation of $846 million.

About half of PN’s business by revenue is tied up in moving coal (a bit harder to ascertain now that coal is lumped in with ‘Bulk Rail’ in the company’s accounts) and overall represents around 34% of Asciano’s total cash flow.

Some analysts have suggested the Canadian predator is likely to divest itself of Asciano’s bulk and auto ports businesses so it can concentrate on the above rail and container terminals business.

This would of course increase its exposure to the risk of any future downturn in PN’s coal business.

Digging rocks out of the ground, burning them, and releasing harmful gases to generate electricity is hardly the epitome of 21st Century thinking and technology.

The problems Adani has with its Galilee project as potential investors duck for cover, have very little to do with local environmental concerns, and a lot more to do with the overall viability of the project as the tide turns.

Coal is definitely on the nose. Energy analyst Tim Buckley from anti-coal think tank, The Institute for Energy Economics and Financial Analysis says Chinese coal imports have fallen about 37% this year, and Indian coal imports are down 11%, although these drops have not directly translated into lower volumes for Australian coal.

Given the current climate it has to be asked why Brookfield would want to expose themselves to what from many angles could end up being risky business – certainly in the medium to longer term.

Brookfield Infrastructure’s CEO, Sam Pollock says, “Combining Asciano’s Australian container terminals with our existing assets in North America and Europe provides the foundation for a global container platform. In addition, Asciano’s leading above-rail operations, together with our Australian and Brazilian logistics businesses, create a powerful, international rail logistics business.”

This would tie in with Kohler’s counter argument that global trade doesn’t usually decline for long.

Given potential changes trends in global trade Kohler says, “Overall, Asciano shareholders would be well advised to keep the Brookfield Infrastructure securities that will form about 25% of the offer and perhaps even buy some more with the cash.”

Personally I’m not convinced. We’ve all been waiting optimistically for the upturn in the global economy for some time and I think we will be waiting for a few years yet.

Even if global trade rallies to bolster Brookfield’s purchase, sitting here at my (temporary) desk in Europe it is obvious that the wind farms of change are blowing in coal’s direction and I’m not predicting any upturn there.

2 Comments

  1. Mark

    1400GW of coal powered electricity generation under planning, construction or commissioning worldwide today. I suspect that the reports of the death of coal may be “greatly exaggerated”. Note freight tonnage for coal overall in Australia has grown in every one of the last 20 odd years. There is no reason to expect that this will not be the long term trend, indeed, there are very real arguments for high quality Australian coals to out compete low rank coals in a carbon constrained market.

  2. Not convinced Gordon. I think the downturn in coal fired generation in the ‘western world’ will have a negative impact on overall global demand. FY2015 was flat for both PN and Aurizon, and both are forecasting flat or slightly reduced tonnages in FY2016.