GAS PRICES MAY FORCE BRICKWORKS TO TAKE MANUFACTURING OVERSEAS
Written on the 14 March 2017
BRICKWORKS Limited (ASX:BKW) chairman Robert Millner says soaring energy prices may force the company to turn to offshore manufacturing.
"We never thought that after 108 years of making bricks in Australia, we would now need to investigate manufacturing overseas," says Millner.
Millner says Brickworks' recent gas contract negotiations, which secured its gas supply until the end of 2019, locked in a 76% price increase across its east coast operations.
Reliable and cost effective gas and electricity supply is critical to Brickworks' operations, particularly in its Austral Bricks division where energy costs represent almost 30% of non-labour related input costs.
"Including the forecast increase in electricity prices, Brickworks will pay an extra $20 million per year in energy costs by 2019 more than 25 per cent of our building products 2016 earnings," says Millner.
"And only one of the major gas retailers was able to provide a firm offer for gas in 2019."
In the face of these increases, the company is urgently investigating a range of mitigation strategies including investments in new fuel efficient kilns, the use of alternative fuel sources, increasing imports and even offshore manufacturing to avoid having to pass on price increases to customers.
"Following repeated warnings from industry over many years, it is now obvious that government has failed to develop an effective policy to address domestic energy supply," says Millner.
"Frustratingly, some governments seem intent on exacerbating the issue, even if that means the lights will go out in houses and factories across the country.
"Exporting our gas is not just putting at risk the jobs of 2-3,000 brick makers in Australia, but also the more than 25,000 bricklayers that rely on an uninterrupted supply of products, not to mention the flow on effect in relation to housing supply."
Millner says immediate intervention is required to alleviate the current energy crisis.
"When committing to ship Australia's gas overseas, the exporters assumed they could meet production requirements from their own reserves. A ban should be put in place preventing them from covering their shortfalls by buying third party gas from assets that have traditionally served the domestic market," says Millner.
"In addition, the government should move to better regulate Australia's gas pipeline infrastructure, to ensure appropriate incentives for new investment.
"Longer term, Australia needs a policy response that focuses on reform such as freeing up exploration and development and getting more suppliers into the market. A failure to act will continue to risk manufacturers moving offshore or increasing imports at the expense of local production and Australian jobs."
The Company will release its half year results on 23 March 2017. The potential cost increases referred to in this announcement do not have an impact on the current financial year's performance.
Brickworks is trading up 3.59 per cent at $13.55 per share at 10.36am AEDT today.
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