Australia power crisis forces manufacturers to eye offshore moves, production cuts

Brickworks

20/06/2022 06:10

By Byron Kaye
    SYDNEY, June 20 (Reuters) - Australia's biggest building
materials manufacturers are cutting back operations, hiking
prices and considering moving production offshore to manage a
spike in power and gas bills, adding to pressure on the
government to resolve the country's energy crisis.
    The CEOs of Brickworks Ltd  BKW.AX , the country's largest
brickmaker, and Boral Ltd  BLD.AX , the top maker of most other
construction materials, flagged the changes even as Australia's
new Labor government scrambles to try to beef up power supplies
and bring down electricity prices.
    Power prices have surged in Australia amid a shortage of
coal-fired generation due to planned and unplanned outages,
which has driven up demand for gas-fired generation at the same
time as gas demand for heating jumped during a cold snap. 
    The price jump has been exacerbated by record high global
coal and gas prices, stoked by sanctions on Russia.
    That has left Australia's A$100 billion ($70 billion)
manufacturing sector, a major power and gas consumer, exposed to
soaring costs, especially those whose cheaper, long-term energy
contracts are expiring.
    Brickworks, for example, has gas contracts with Santos Ltd
 STO.AX  averaging A$10 per gigajoule, locked in for two years,
compared to the current government-mandated price cap of A$40.
    "If we had to pay, when our contract rolled over, (the
current spot price), we would no doubt be shutting plants down
and moving production offshore," said Lindsay Partridge,
managing director of Brickworks. 
    Brickworks pays just $3 per gigajoule for gas in the United
States, where it owns Pennsylvania-based brickmaker Glen-Gery
Corp. 
    "If we rolled over and you had to pay A$40, and I could buy
gas in the U.S. for $3, then it's a pretty easy equation to work
out," added Partridge. 
    The United States generates just one-sixth of Brickworks'
earnings from building materials, but the company could save
money by shipping product back to Australia, he said.
    Boral, which downgraded its annual profit forecast in May
partly due to energy costs, told Reuters it has cut back on
operations due to "the speed and magnitude of the change in
energy prices".  urn:newsml:reuters.com:*:nL3N2XA01U
    "We have been forced to temporarily curtail some areas of
our operations and unfortunately have been left with no other
option than to pass increases onto customers directly," said
Chief Executive Officer Zlatko Todorcevski in an email to
Reuters, without specifying the size or products affected by the
cuts. "We have also had to accelerate plans to review our
overheads as we offset these inflationary challenges." 
    Boral welcomed a move last week by the Australian energy
market operator to cap wholesale power prices and take control
over power supplies, but Todorcevski said those temporary
measures "do not provide long-term confidence for large
manufacturers".
    The Business Council of Co-Operatives and Mutuals said this
month manufacturers were choosing between shutting "uneconomic
operations" and passing higher costs to consumers as energy
bills jumped more than 600% in a few months.
    Incitec Pivot  IPL.AX , Australia's top fertiliser maker,
has said it would close its Brisbane plant at the end of 2022
because it was unable to line up an affordable gas contract.

    GAS EXPORT CONTROLS
    The latest crisis has highlighted the need for more gas
supply in the domestic market, for a country which is the
world's biggest exporter of liquefied natural gas (LNG).
    Manufacturers have long clamoured for gas export controls or
a reservation of gas for the domestic market. Gas prices have
more than tripled in price since 2014, when Australia started
exporting LNG from the east coast.
    In Western Australia, where 15% of gas is reserved for local
consumption, domestic prices are a fraction of the capped east
coast price.
    "There's certainly a strong call from many quarters for
something to be done and a lot of people point to gas export
controls," said Tennant Reed, energy policy director at the
Australian Industry Group.
    Australia's new resources minister, Madeleine King, has said
all options are on the table for dealing with gas supply
challenges. 
    Successive governments have previously opposed a gas
reservation on the east coast, under pressure from gas producers
which say the structure would deter further investment.
    "It was something I raised 10-12 years ago with the previous
Labor government about allowing all the gas to be exported, and
connecting up the east coast of Australia into international
markets," said Partridge, the Brickworks managing director.
    "Now it's all come home to roost."
    ($1= 1.4388 Australian dollars)

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Australian electricity generation    https://tmsnrt.rs/3mY8KYy
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 (Reporting by Byron Kaye; Additional reporting by Sonali Paul
in Melbourne; Editing by Lincoln Feast.)
 ((byron.kaye@thomsonreuters.com; +612 9171 7541; @byronkaye;))