The CEOs of Brickworks Ltd, the country’s largest brick maker, and Boral Ltd, the largest maker of most other building materials, have signaled the changes as Australia’s new Labor government seeks to strengthen the electricity supply and lower electricity prices.
Electricity prices have soared in Australia due to a shortage of coal-fired generation due to planned and unplanned outages, which has increased demand for gas-fired generation along with demand for gas for the heating surged during a cold snap.
The rise in prices has been exacerbated by record world prices for coal and gas, fueled by sanctions against Russia.
The Australian $100 billion ($70 billion) manufacturing sector, which is a large consumer of electricity and gas, is therefore exposed to soaring costs, particularly those whose long-term energy contracts, less dear, arrive luck.
Brickworks, for example, has gas contracts with Santos Ltd averaging A$10 per gigajoule, locked in for two years, compared to the current government-imposed price cap of A$40.
“If we were to pay, at the end of our contract, (the current spot price), we would probably be closing factories and moving production overseas,” said Lindsay Partridge, managing director of Brickworks.
Brickworks pays just $3 per gigajoule for gas in the United States, where it owns brick maker Glen-Gery Corp. down in Pennsylvania.
“If we turned around and you had to pay 40 Australian dollars, and I could buy gas in the US for 3 dollars, the equation is quite easy to solve,” Mr Partridge added.
The United States generates only one-sixth of Brickworks’ revenue from building materials, but the company could save money by shipping its products back to Australia, he added.
Boral, which downgraded its full-year profit forecast in May in part due to energy costs, told Reuters it had reduced operations due to “the speed and magnitude of the energy prices.
“We have been forced to temporarily reduce certain areas of our operations and unfortunately had no choice but to pass the increases directly on to customers,” Chief Executive Zlatko Todorcevski said in an email to Reuters, without specifying. the size or the products concerned by the reductions. “We also had to accelerate our overhead review plans to offset these inflationary challenges.”
Boral welcomed the initiative taken last week by the Australian energy market operator to cap wholesale electricity prices and take control of electricity supply, but Mr Todorcevski said that these temporary measures “do not give long-term confidence to large manufacturers”.
The Business Council of Co-Operatives and Mutuals said this month that manufacturers had to choose between shutting down “unprofitable operations” and passing on rising costs to consumers, with energy bills jumping more than 600% in a few months.
Incitec Pivot, Australia’s biggest fertilizer maker, said it would close its Brisbane plant at the end of 2022 because it was unable to find an affordable gas contract.
GAS EXPORT CONTROLS
The latest crisis has highlighted the need for greater gas supply on the domestic market, for a country which is the world’s leading exporter of liquefied natural gas (LNG).
Manufacturers have long called for gas export controls or gas reservations for the domestic market. The price of gas has more than tripled since 2014, when Australia began 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 East Coast price cap.
“There is certainly a strong call from many quarters for something to be done and many people are pointing the finger at controlling gas exports,” said Tennant Reed, director of energy policy at the Australian Industry Group.
Australia’s new resources minister, Madeleine King, said all options are on the table to deal with gas supply challenges.
Successive governments have previously opposed a gas reserve on the east coast, under pressure from gas producers who say the structure would deter further investment.
“It’s an issue I raised 10-12 years ago with the previous Labor government, about allowing all the gas to be exported, and connecting the east coast of Australia to international markets.” said Mr. Partridge, Managing Director of Brickworks.
“Now everything is back to normal.”
($1 = 1.4388 Australian dollars)