As previously communicated, in the face of increasingly difficult domestic trading conditions for its soda ash business, Penrice Soda Holdings Limited has been conducting a strategic review of its entire chemicals business to improve its competitiveness.
Strategic review of chemicals business concludes
Two of Penrice’s three chemicals businesses units are performing well. Penrice’s sodium bicarbonate business, a predominantly export business to food and pharmaceutical customers, has doubled sales and profits over the past five years. Penrice’s new selective salts recovery (SSR) technology made its first profit in FY2012 and has potential to profitably deliver wastewater treatment solutions for the coal seam gas (CSG) industry.
Penrice’s soda ash business has been under extraordinary pressure. Imported soda ash continues to be substantially (over 40%) cheaper because of a number of factors which are likely to continue for the foreseeable future. These factors are the unprecedented strength of the Australian dollar, lower international shipping costs, increasing energy and labour costs, increasing taxes (notably the carbon tax) and increasing regulatory compliance costs.
These have also added to the costs of domestic soda ash manufacture relative to imports. These same pressures are also playing out across Penrice’s soda ash customer base - mainly glass and detergent manufacturers - creating significantly less demand for soda ash. The strong Australian dollar has led to domestic bulk wine being bottled overseas and less demand for Penrice’s soda ash.
Continuing poor demand associated with the downturn in Australian building and construction activity has meant considerably less domestic flat glass manufacture and therefore less demand for Penrice’s soda ash.
Penrice does not see any significant change to these factors occurring in the foreseeable future. These factors have combined to reduce the profitability of Penrice’s soda ash business, which continues to make a considerable loss in FY2013. The uncertainty associated with these factors, such as whether some are more structural than cyclical, has led the company to decide to import soda ash rather than manufacture it.
Closure of soda ash production at Adelaide plant
As part of its strategic response to continuing decline in demand for soda ash and increasing costs, Penrice intends to close soda ash production at its Osborne, Adelaide chemical facility in June 2013.
Regrettably, this will reduce production and ancillary roles and impact 60 jobs at its Osborne plant from May 2013 onwards. Penrice will consult with employees and their representatives to explore all options, including mitigating job losses, potential redeployment within Penrice where possible and redundancy payments consistent with relevant instruments.
MOU signed for new soda ash JV
Penrice has signed a legally binding Memorandum of Understanding with SASS Victoria Australia Pty Ltd (SASS) to form a Joint Venture (JV) to import and market soda ash in Australia. The commencement of the JV is subject to satisfaction of conditions including final due diligence and signing definitive transaction documents. Assuming these conditions are satisfied as expected, JV sales are expected to commence in May 2013.
SASS is a subsidiary of Soda Ash Holding BV, a Dutch Holding Company, that controls a number of soda ash distributors globally, making it the world’s largest independent distributor of soda ash per year, reselling over 1 million tones of soda ash throughout South America, Russia, Ukraine and CIS countries and elsewhere.
The soda ash for the JV will be sourced from American Natural Soda Ash Corporation (“ANSAC”), which operates globally as the sales, marketing and logistics arm for three leading producers of natural soda ash in the United States - FMC, Tata Chemicals and OCI. ANSAC exports approximately 4 million tonnes of high quality natural soda ash per annum, making ANSAC the single largest soda ash exporter in the world.
Penrice proposes to transfer its soda ash sales to the JV, switching from supplying its customers with its own manufactured soda ash to the JV supplying those customers with imported soda ash sourced from ANSAC. Continuity of supply and quality of soda ash for Penrice’s existing customers shall be maintained.
Switch to imported soda ash for resale from May 2013
The proposal means all of Penrice’s existing customers’ soda ash requirements will be imported and supplied through the JV from May 2013. Penrice’s cost base will be considerably reduced and flexibility to respond to changes in domestic demand will be enhanced. The Osborne plant will continue to operate as, a sodium bicarbonate manufacturing facility and a quicklime manufacturing facility.
Penrice has conducted trials with imported ANSAC soda ash and has produced sodium bicarbonate of the equivalent quality to current specification. Therefore, customers can be assured that quality and reliability of supply will be maintained. Continuity of supply will be maintained and is unaffected by this change. Angaston mine production efficiency improved.
There will be a reduced requirement for Penrice’s Angaston mine to supply limestone to its Osborne plant. This will result in reduced costs from less extraction and overburden stockpiling, leading to improved cash generation. Penrice will continue to be a leading player in the industrial minerals, aggregate and civil markets. No job losses at the Angaston mine are forecast.
Penrice will continue to operate its kilns at its Osborne chemical facility to provide the necessary carbon dioxide to the sodium bicarbonate plant. In the process, Penrice will produce low cost quicklime for sale into the Australian market.
Penrice and Cheetham Salt are parties to a long term ‘take or pay’ supply agreement for supply of salt to Penrice’s soda ash plant. If the plant is closed as planned, Penrice’s requirements for salt will cease. Recognizing the importance of the contract to both parties, the parties are in discussions regarding the proposed JV and the impact of the proposed closure of the plant on the agreement.
They are working constructively to manage the contract in a manner which advances the best interests of both parties. Further announcement on the matter will be made as and when the JV is formed.
Benefits of the switch to the JV
Chemicals are a core business for Penrice, with its profitable sodium bicarbonate business growing in Asian markets. Its profitable SSR business, which is being well supported by the coal seam gas industry, leverages innovative unique technology and is another growing business. By entering this new soda ash JV for the Australian soda ash market, Penrice will eliminate its only loss making business by better aligning domestic demand with a flexible and competitive cost structure which can be maintained through demand cycles.
Penrice’s soda ash business is making a loss. Following plant closure and formation of the JV in FY2013, forecast earnings in FY2014 are expected to be materially improved, returning the soda ash business to profitability.
Penrice expects to book an impairment charge against soda ash manufacturing assets when the JV is formed, which is expected to be in the next couple of months. The proposed JV provides for improved environmental outcomes.
The closure of soda ash production will mean around two thirds less carbon is produced reducing the liability for the payment of the carbon tax by a similar proportion. It will also mean the cessation of ammonia and calsilt discharge to the adjacent Port River from mid 2013, both of which have created a steeply increasing cost burden in the past several years.
About Penrice
Penrice Soda Holdings Limited is Australia’s only manufacturer of soda ash and sodium bicarbonate and one of the world’s largest sodium bicarbonate marketing companies. It also operates a limestone mine, supplying industrial minerals and civil products. The Company is committed to driving shareholder value through the manufacture and supply of a range of world-class products across a variety of industries and countries including packaging, building and construction, mining, detergents, food and personal care, stock feed and environmental control/water purification.
