Explosives giant Orica says gas prices in Australia tripled over the past decade,driving the manufacturer’s investment decisions offshore to countries such as the US and Canada,where prices are at all-time lows.
Orica chief executive Sanjeev Gandhi says high gas prices are a big problem.Peter Rae
Chief executive Sanjeev Gandhi said Orica invested $1.5 billion in two acquisitions over the half-year to March but not “a single cent” in Australia.
“That was a miss for Australia. That was funding from Australia that went overseas,not investment in Australia in manufacturing. If I get better margins and better prices elsewhere,obviously my capital goes there,” Gandhi said.
Resources Minister Madeleine King said on Thursday the government would back the case for new gas fields and import terminals to secure supplies and underpin its “made in Australia” agenda in next week’s federal budget.
Australia could avoid future shortfalls by opening contentious new gas fields,such as Woodside’s Scarborough basin off the Western Australian coast or Narrabri,Santos’ project under development in northern NSW.
“My message is:let’s first protect the present. If you don’t have a manufacturing base,what do you produce in the future? Nothing!”
Sanjeev Gandhi,Orica chief executive
The policy shift sets Labor up for a clash with the Greens and environmental groups,which are pushing to phase out new sources of gas,a major contributor to global warming.
Climate Council head of policy and advocacy Jennifer Rayner said the government had a choice:either cut climate pollution and scale up clean energy or support new gas projects.
“It can’t do both,” Rayner said. “More gas means more climate pollution and a more dangerous future;it’s that simple.”
Gandhi said,while he liked the government’s “made in Australia” strategy,bringing on new supply would take at least a decade. The greatest challenge facing the country’s heavy manufacturing today was soaring energy costs,including gas,he said.
“My message is:let’s first protect the present. If you don’t have a manufacturing base,what do you produce in the future? Nothing!” he said.
Other companies,too,are struggling with high manufacturing costs. Global confectionery and food giant Mars recently said its local factories were among its most costly to run,and Wesfarmers late last year took a swipe at gas producers after prices soared from $2 per gigajoule a few years ago to around $12 on today’s spot markets.
Orica’s gas struggles didn’t stop it from reporting a significant jump in half-year profit to $337.5 million,boosted by land sales in Deer Park Victoria. Underlying earnings for the global group were up 10 per cent,driven by technology investments and strong conditions in the mining sector.
“We’ve invested a lot in the past in technology in the digital business. We are now successfully starting to scale that up,and that becomes material. That’s where you see that EBIT and earnings uplift coming through,” Gandhi said.
The Australian government will open up new gas projects to meet its energy supply needs under a new medium and long-term strategy.
As well as pressing its advantages in technology – it bedded down two key acquisitions over the half year,absorbing Canadian geospatial software firm Terra Insights and US sodium cyanide manufacturer Cyanco – Orica’s commodities focus has also hit a sweet spot.
Copper,gold and future-facing minerals are in demand. “That’s clearly the area where we are the strongest. We’re playing the sweet spot of the moment,and that translates into better earnings and better shareholder returns for us,” he said.
Gandhi blamed Orica’s gas struggles on the government’s mandatory $12 per gigajoule price cap for domestic sales introduced two years ago,designed to curb the run-up in electricity prices.
The pricing mechanism failed to include gas retailers,and a number of exemptions made it difficult to negotiate gas contracts under the price cap.
“Unfortunately,the $12 which started off as a price cap has now become a floor,” Gandhi said. “I’m just asking to get adequate supply for genuine consumers like Orica and others at the right price.”
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