Australian fertiliser group Incitec Pivot (IPL) says high gas prices are to blame for its decision to shut down its 50-year-old manufacturing plant on Brisbane’s Gibson Island.
The company will take costs and write downs of more than $18 million in its 2020-21 results to be released next Monday linked to the closure decision while there will be added costs of perhaps $20 million a year.
Around 170 jobs will be affected but plans to produce green ammonia at the site with Fortescue Future Industries, if viable, could see that figure reduced.
IPL shares eased 0.6% to $3.13 on the ASX on Monday
The company has warned several times recently that it was finding it hard to find gas supplies at an acceptable price and yesterday it cracked and said no more, the price ain’t right.
CEO Jeanne John said it was “disappointing for our people and Australian manufacturing that we could not reach a suitable commercial gas supply agreement to continue the operation of the Gibson Island facility from processing natural gas, however we look to create new opportunities aligned to the Company’s forward strategy.”
Incitec uses gas as a raw material for producing fertiliser products such as ammonia. It is Australia’s biggest commercial gas user, but group has been unable to strike what it thinks would be a satisfactory supply deal thanks to pressure from a rise in gas prices on the East Coast in recent years.
As a result, IPL says it will stop manufacturing operations at the site at the end of the current natural gas feedstock supply arrangements which finish at the end of December 2022.
But it is not all quite as gloomy – IPL said that despite this decision to cease manufacturing with natural gas at the end of 2022, “the feasibility study into industrial-scale production of green ammonia at Gibson Island will be progressed to potentially re-purpose the facility.”
IPL said it remains “fully committed to being the leading supplier of quality fertilisers and soil health services to the agricultural sector. Urea, sulphate of ammonia and other specialty products will be sourced from IPL’s existing international import supply chains to replace these manufactured products.”
IPL’s Brisbane fertiliser distribution centre operation will continue beyond the closure of the manufacturing operations.
The impact on IPL’s earnings from January 2023 is as follows: earnings from Gibson Island domestically manufactured products will end; Dyno Nobel Asia Pacific will make alternative arrangements for ammonium nitrate production that utilises approximately 20,000 tonnes a year of ammonia that is currently supplied from Gibson Island.
IPL said the financial impact of these alternative arrangements is expected to range between $5 million-$10 million a year.
Stranded Corporate and insurance costs are expected to be approximately $10 million a year “representing costs that have previously been allocated to the plant.
The estimated one-off pre-tax financial impact of the closure of the manufacturing operations (which will be accounted for in the FY21 results) are as follows:
Cash costs of closure will be around $83.5 million (this includes employee redundancies and costs associated with plant decommissioning); non-cash write down of assets: around $102.5 million, representing the cost of the last turnaround and other maintenance, spares and site infrastructure expenditure.
“Proceeds from land sales: circa $0 – $45 million, noting that proceeds from land sales are dependent on final decisions related to future use opportunities, including the potential use of the site for a green ammonia project,” the company said
Ms John added:
“IPL’s commitment to the Brisbane area remains strong as we continue to invest in our import distribution centre at Gibson Island and look for opportunities to re-purpose the site for the future.
“We will continue to support our agricultural and industrial customers and suppliers who have supported our manufacturing operations at Gibson Island through to the end of 2022, as we transition our business.
“IPL is fully committed to being the leading supplier of quality fertilisers and soil health services to the agricultural sector through our continuing domestic fertiliser manufacturing and international import supply chains.”
