Pricey way to test Fonterra pet theory

Today's Business View contributor is New Plymouth man Duncan Reid, who previously spent many years working for the New Zealand Dairy Board in the packaging and transport sections.

Last updated 10:43 01/09/2009

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Fonterra's recent announcement that it intends transporting by rail 22,000 containers of Taranaki-manufactured product to the ports of Auckland and Tauranga for export deserves critical scrutiny.

An immediate claim after the announcement was that the New Zealand taxpayer will help pick up the cost through the Government's $90 million subsidy of KiwiRail.

And even worse for Taranaki, our regionally- owned Port Taranaki faces an immediate downsizing of its container terminal - and, if things don't improve, closure.

Why the subsidy? They distort the market and send out the wrong economic signals on both expenditure and investment. Maybe that's why Federated Farmers, the price/cost watchdogs for the rural community, has been strangely silent on this issue. And KiwiRail is also keeping its profile lower than a snake's belly.

The truth is that no end of subsidy is going to make our rail system leaner, meaner or more commercially and financially efficient.

A decade ago the then New Zealand Dairy Board did a costing exercise relating to Kiwi Co-op Dairies products manufactured at the Whareroa site in Hawera. I estimate that the pricing estimates then would be roughly the same now due to the competitive nature of transport.

So this is what I figure will be the case with Fonterra's recently announced rail transport operation. The cost of sending a 20-foot container (TEU) from Port Taranaki to Whareroa and return will be $400 - but the cost of railing the same container from Hawera to Marton and then on to Auckland or Tauranga will be $1200.

Let's multiply those costs by 22,000. Using Port Taranaki would cost $8.8 million, while sending all those containers to Auckland/Tauranga would cost $26.4m - an additional $17.6m every year just to get the Fonterra product to a port.

But it gets worse. Experts say there is a multiplier effect to a factor of five as money moves through the economic system. So the true cost becomes $88m.

This means our Taranaki economy stands to lose $88m a year as a result of KiwiRail moving our regionally- manufactured products to Tauranga or Auckland ports.

That will have all sorts of unfortunate downstream effects. Local regional work opportunities will suffer as the port, transport companies and support industries downsize or shut. Taranaki, as the sole shareholder in Port Taranaki's container terminal, will receive less in dividend as cash flow dies away and capital equipment lies idle.

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I'd like to repeat in full a recent quote by Fonterra's supply chain manager. He said: "People need to understand the dynamics of the extended supply chain - it's more than simply comparing the cost of overland transport between Whareroa and New Plymouth, and Whareroa and Auckland. Many other influences have to be factored in. Where do the containers get unloaded? How did they get there? What's the cost of empty containers sitting in a port? What's the fuel cost of getting a ship to port to pick up the containers? This is all to do with transparency. Everyone can have the absolute confidence that this change has been made in the interests of our customers and shareholders."

Well, let's see if we can add some more transparency.

The Fonterra man said in a recent edition of the Shipping Gazette that he perceives the future of shipping Fonterra product to involve container ships capable of carrying 6000 TEU-sized containers, visiting one or two New Zealand ports - one North Island, one South Island - to uplift cargo. But even the major shipping companies have said no to this, as it doesn't stack up financially. So why try to prove a pet Fonterra theory, using taxpayer money?

Where do containers get unloaded, and how did they get here? Most do arrive in New Zealand via Auckland or Tauranga, but this needs qualification. Three-quarters of New Zealand's population lives north of Taupo, so most imports need to go into the north of the North Island. However, we import far fewer full containers than we export. So we will always need empty containers to be repositioned into New Zealand to support our export volumes, roughly 1.55 million TEUs per year. These containers are brought into New Zealand from Australia and Singapore. Some are transported by coastal repositioning vessels, others by direct feeder services, some by rail.

What's the cost of empty containers sitting in a port? Very little, so long as the same empty container comes back to the same port with a full export cargo. Due to our short peak export season, empty containers return to New Zealand during winter when slots are available on ships, because there simply is not the space available during the summer export season to do it all at once. Port companies price light accordingly - they want, and need, the fully laden export containers.

What's the cost of fuel to get a ship to port? Container ships run on heavy fuel oil for the main engines. Consumption rates are around 70 metric tonnes a day - and Singapore prices per metric tonne in March were US$263, or US$18,410 per day.

Ships arrive at Port Taranaki either directly, or via Cook Strait or Cape Reinga before departing for overseas. Transit time from either end of the North Island is 10 to 12 hours, at a cost of US$9862, which is the US$19,725 divided by half. The land transport option doesn't financially stack up unless a taxpayer subsidy covers the cost.

What happens when the $90m subsidy runs out in three years? Port Taranaki may not have any container terminal left by then. Who will pay the $17.6 million a year cost then?

- © Fairfax NZ News

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