Eutility's weekly news

Power price surge slices up to 14pc from profits: Citi analysts

Power price surge slices up to 14pc from profits: Citi analysts

Australian investors are about to get a taste of what the country’s neglect of energy policy is costing business, with soaring electricity and gas prices expected to clip 5-14 per cent from pre-tax profits at companies ranging from Woolworths to Wesfarmers and Inghams to NextDC.

Companies across transport, retailing, mining, electricity, data storage and manufacturing will be hit by the surge in energy prices, according to analysts at Citi.

The timing will depend on when long-term contracts typically used by major companies roll off and expose those businesses to the new supply and price conditions.

The recent spike in electricity and gas prices is expected to be sustained for at least three years as policymakers attempt to overcome years of neglect to restore reliability and affordability to the system, Citi said.

The analysis comes as Glencore’s most senior Australian executive this week warned that companies would close unless government policy shifted priorities to affordability and ­reliability.

Rio Tinto this week said higher Australian energy costs had knocked $63 million from its 2017 operating profit.

“Electricity prices have spiked higher across all the major states, excluding Western Australia,” the Citi team led by Craig Woolford said. “For most Australian-based companies, we expect the impact will likely be felt over 2017-18 and 2018-19, as most companies will have two or three-year contracts.”

Data centre company NextDC would suffer the biggest relative effect, with a 14 per cent, or $16m, hit to pre-tax profits. Still, higher prices could increase demand for its services, Citi said.

Ingham’s processing centres could take a 12 per cent earnings hit, while the big-store networks of Wesfarmers and Woolworths could be hit by about ­­­5 per cent.

Citi said the mining sector was exposed to power price increases and reliability problems. Aluminium smelters would be particularly affected. The big miners would take less of a hit.

Glencore coal boss Peter Freyberg this week called for urgent action to help heavy industry deal with high prices. Glencore’s annual power bill in Australia is about $400m and it has said its Townsville copper refinery risks closure.

Rio CEO Jean-­Sebastien Jacques has curtailed production and 100 jobs at the Boyne Island smelter at Gladstone.­­

“There is a serious situation in relation to energy in Australia,” Mr Jacques told London analysts on Wednesday night after the release of the company’s first-half profit report. “When I look at the plan, either­ at the state level or the federal level in Australia, where people want to develop more manufacturing activities, that will not work if the industry can’t have access to a reliable and affordable source of power. The model is broken today.”

The Australian

Post a comment

Captcha Image