A third wave of wage subsidy introduced due to the Covid-19 outbreak, plus ASB warns of Reserve Bank interest rate going negative

Wage subsidy extended to support struggling business

The Government has confirmed that it won’t need to tap the $14 billion contingency in its Covid response and recovery fund to cover the wage subsidy extension.

Finance Minister Grant Robertson yesterday announced the details of the extension to help businesses through the latest Covid-19 lockdown, particularly those in Auckland which have been subject to Level 3 restrictions since last Wednesday

Businesses claiming the subsidy will need to report or predict a revenue drop of at least 40 percent due to Covid for any 14-day period between August 12 and September 10, from a year earlier, to be eligible for the latest extension.

The Treasury estimates 470,000 jobs will be covered by the extension at a cost of $510 million, and that another 460,000 workers will be eligible under the existing extension at a cost of $1.1 billion.

Robertson said the additional $1.6 billion covering 960,000 staff “will be covered by the underspend in existing wage subsidies.

He also announced the Government would invest up to $200 million in the construction of the University of Auckland’s new Faculty of Education and Social Work building project to make sure work can start this year.

ASB Bank forecasts a negative OCR by April next year

Macro-economic forecasting agency Fitch Solutions, a division of Fitch Ratings, has downgraded its outlook for NZ’s economy, forecasting a deeper contraction this year but partially offset by a stronger recovery in 2021.

ASB Bank economists are also predicting a weaker recovery than their previous forecasts. They now expect the Reserve Bank to take the official cash rate into negative territory next year, forecasting a minus 0.5 OCR in April 2021 from its current 0.25 percent level.

That had investors scurrying for yield stocks, pushing the NZX50 up 220 points yesterday, a gain of almost 2 percent, allowing the market to effectively recover all its losses resulting from last week’s sell off in the wake of lockdown restrictions being reimposed.

Bluescope Steel warns of uncertain outlook for its New Zealand operations

The outlook for BlueScope Steel’s New Zealand based operations isn’t looking favourable after the company warned it is preparing to spend up to A$50 million to lay off a “substantial” number of staff and reduce the scale of its operations here.

The Australian listed company which owns the Glenbrook steel mill and Pacific Steel business in Otahuhu reported a A$206 million first-half operating loss yesterday on its New Zealand operations. Last month it wrote A$197 million off the value of the business. Excluding the write-down, the loss was A$5.8 million.

BlueScope is the country’s only producer of steel, which it makes at its Glenbrook plant by smelting local iron sands with local and imported coal. It also owns Pacific Steel and employed around 1,400 workers across both sites last year. Its brands include Colorsteel, Galvsteel and Axxis framing.

The company has been under pressure for some time due to on-going competition from imports from China and other Asian low-cost producers. In June, it shut its unprofitable pipes and hollow sections operation at Glenbrook with the loss of 51 roles.

BlueScope said sales for the NZ division dropped 11 percent to $792.4 million for the six months ended June due to the lockdown and lower steel and vanadium prices. The company also noted that since 2015, NZ carbon prices have roughly quadrupled to $35 a tonne, a cost few of its competitors face.

Bluescope Steel shares closed at A$12.35 on the ASX, up 2.3 percent.

Refining NZ half-year loss widens

Refining NZ reported a $186.3 million half-year loss yesterday and said it will keep operating in a low-volume mode while it continues a strategic review of its operations near Whangarei. Increasingly the signs are pointing to the review recommending the refinery be closed or significantly scaled back in favour of imported supplies of refined oil.

The company has been operating its Marsden Point refinery at reduced capacity since March after Covid-19 restrictions dramatically cut local fuel demand and collapsed international refining margins. While petrol and diesel volumes are back to near pre-Covid levels, jet fuel demand – a key product for the refinery – is still down around 60 percent.

The refinery was idled for six weeks recently as part of a plan to draw down fuel stockpiles around the country. Earlier this month the company signalled it expected to write-down the value of its refining operations by about $220 million, pre-tax, due to the weakened long-term outlook for refining margins.

The $218.9 million of impairments reported yesterday for the six months ended June were the biggest contributor to the loss and follow a $3.5 million loss last year. Revenue fell 31 percent to $116.2 million, reflecting lower throughput while margins fell dramatically to just US$1.82 a barrel from US$5.31 the year before.

Ebitda fell to $15.4 million from $54.1 million a year earlier while operating costs also declined by about $8 million due to reduced processing volumes.

Refining NZ also reported that Andrew Brewer — who joined the company in February as chief operating officer — will depart in November.

Refining NZ shares closed yesterday unchanged at 67c. The shares are down almost 70 percent since August last year and close to their March low of 62c.

Summerset result cheers investors despite decline in net profit

Despite Summerset Group’s first-half net profit falling 99 percent due to write-downs in the value of its retirement villages and Covid-related impacts, investors focused their attention on the company’s underlying result which came in at the top end of its earlier guidance, pushing its shares up 5.4 percent.

Net profit for the six months ended June fell to $988,000 versus $92.6 million in the same six months last year, but the underlying result was $45.1 million, down 6 percent. In July, Summerset forecast an underlying result between $40 million and $45 million. Investors also welcomed confirmation of a 6 cents per share interim dividend, down slightly from the 6.4 cents the company paid last year.

The value of its villages fell $14.7 million compared with an $85.7 million increase in the year-earlier six months.

The company said it was too early to know how recent Covid-19 developments would impact on Summerset in the second half of the year. However, despite the valuation write-downs, Summerset’s total assets at June 30 were $3.43 billion, up 13 percent on a year earlier with a total of 139 new homes completed in the latest six months. It expects to complete a further 300 and 350 new homes by the end of this year if no further Level 4 lockdown restrictions are imposed. Construction work is permitted to continue under Level 3 restrictions.

Three new retirement villages were launched in the six months at Tauranga, Napier and New Plymouth, with a new wing at it Casebrook village in Christchurch. A development application for its first retirement village in Australia, located in Melbourne, had been lodged with work scheduled to begin before the end of the year.

Summerset shares closed at $7.77 up 5.4 percent but are well off their $9.30 high in January.

NZ Oil & Gas upgrades Kupe gas output for a third time

NZ Oil & Gas shares surged almost 10 percent yesterday after recent studies increased expected reserves in the Kupe gas field off the coast of Taranaki.

Remapping of the fields, undertaken by operator Beach Energy, resulted in a 23 percent increase to proven and probable reserves. Proven reserves specifically increased 61 percent.

The Kupe gas and oil field is a joint venture between Genesis Energy, NZ Oil & Gas and Adelaide-based Beach. It provides approximately 15 percent of NZ’s annual gas demand and is projected to deliver about half the country’s anticipated LPG demand until 2025.

The new estimate increased NZOG’s total share of the field’s proven and probable oil and gas reserves from 1.84 million to 2.26 million barrels. Developed reserves rose 37 percent and undeveloped reserves were up 16 percent.

Shares in Genesis Energy, which owns a 46 percent share of the venture and has first rights to natural gas produced, rose 1.4 percent to $2.79.

In a statement the company said it was the third significant reserves upgrade since 2010 and demonstrates the field’s ongoing quality and productivity.

Services Index unchanged in July

The BNZ – BusinessNZ Performance of Services Index held steady at 54.3 in July, unchanged from the June result, but the August result is widely expected to weaken as a result or new lockdown restrictions.

BusinessNZ chief executive Kirk Hope said that the solid result for July builds on the return to expansion in June, although possible headwinds with recent Covid-19 community transmission may impact the results ahead.

Of the five main indices the only one below 50 in July was employment at 49.7.

Finance Minister Grant Robertson’s announcement of further assistance to employers is likely to cushion the blow for many businesses in the sector still recovering from the earlier lockdown, though a further knock to business confidence may be harder to suppress.

Japan records worst GDP slump on record

Japan has reported its worst drop in GDP on record as the ongoing Covid-19 outbreak significantly dented consumption.

The world’s third-largest economy shrank 7.8 percent in the second quarter, the country’s Cabinet Office said yesterday. That translated to an annual rate of decline of 27.8 percent, the worst since modern records started in 1980 and the third consecutive quarter of contraction.

But Japan performed better than other major economies in the April-June period, when the United States and Germany both recorded 10 percent falls over the previous quarter and British output contracted a record 20.4 percent.

Among the remaining G7 economies, Canada’s statistics agency said it expects second quarter GDP to contract 12 percent from the previous quarter.

China, however, returned to growth in the second quarter, meaning the world’s second largest economy dodged a recession following its worst start to the year in decades.

Andrew Patterson is Newsroom's Markets Editor and has worked for decades as a financial journalist, radio presenter and editor with Australia's ABC, Radio Live and NBR.

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