Engineering News

Caltex Write-Down Ups Risk of Refinery Closures
February 17, 2012

A $1.5 billion write-down by Caltex Australia of its refining assets has increased the risk that its two plants will close and added to the manufacturing industry's woes because of the strong dollar, rising costs and intense overseas competition.

Caltex chief executive Julian Segal said yesterday the charge did not mean the two refineries in Brisbane and Sydney would be closed, but said relying solely on imports to supply customers was one option. "Continuation of the status quo is not sustainable," Mr Segal said.

Caltex, which supplies more than a third of Australia's motor fuels, has been reviewing its loss-making refinery business since August but is still six months away from deciding on its fate. Some 800 Caltex employees and about 650 contractors work at the plants.

But the 80 per cent write-down has highlighted the problems faced by Australia's small, old refineries and comes on top of Alcoa's decision to review its Point Henry aluminium smelter in Geelong and warnings from Alumina chief executive John Bevan of the difficulties being caused by the robust dollar.

"The strong Australian dollar certainly makes it more difficult to make money in Australia than it was previously," Mr Bevan said. "Certainly, from a current aluminium price and current Australian exchange rate relative to the US dollar, it is very difficult to operate the smelters in particular."

Meanwhile, the construction materials manufacturer Adelaide Brighton said it was re-examining its high-cost clinker kilns. "The reality is the dollar encourages us to rely more on clinker imports, regardless of the carbon tax," said managing director Mark Chellew.

Caltex's Julian Segal yesterday held back from urging the government to tackle the rising cost base of local industries, saying that "big market forces" were at play driving the dollar higher, alongside major global economic and financial issues. "Caltex is very much focused on making sure there is reliable supply and anything that is going to ensure that is going to be welcomed," he said.

Morgan Stanley analyst Stuart Baker said: "This is broader than just a Caltex issue, with Australian manufacturing across the board facing a declining competitive position.

"Caltex has structural issues and management is responding as you'd expect, which is to defend that asset and make it as viable as possible but the rising Australian dollar, increasing input costs and poor margin outlook are macro headwinds beyond its control and it's not obvious when these headwinds will abate."

The impairment cuts the carrying value of the refineries on Caltex's books by more than 80 per cent to $340 million. It will be reflected in Caltex's 2011 full-year earnings and send the company's bottom line into the red by about $630 million, said Deutsche Bank.

Caltex, which is half-owned by US oil giant Chevron, flagged a possible write-down in December when it warned that its full-year profit would fall by up to 40 per cent. Last year it announced charges of $67.7 million on the closure of two units at Kurnell in NSW.

Australia's seven remaining refineries are small and relatively old compared with the massive plants coming on stream in India and China.

Last year Royal Dutch Shell announced the closure of its Sydney refinery, which it will convert into an import terminal. It has given no guarantee about the future of its second plant, in Geelong.

Despite Mr Segal's comments, some analysts see the write-down as a sign that Caltex is moving towards the closure of at least one refinery. "We expect Caltex would prefer to close its refineries if it possibly could, but needs to secure a safe and reliable fuel supply," Credit Suisse said. It values Caltex at $18.44 a share if it closes both refineries and continues as a marketing business but at $10.60 a share if it keeps the plants open

But Morgan Stanley's Mr Baker said he saw no bullish story in Caltex cutting back on refining. "Actions to rationalise refining bring risks to marketing which have yet to be defined," he said.

Caltex chief financial officer Simon Hepworth said the company's forecast for underlying profit for 2011 was unchanged.

"Importantly, there is no impact on sale and reliable operations, credit metrics or debt covenants," he said. "Our balance sheet continues to be strong and we remain committed to retaining our BBB+ credit rating."

Source: Australian Financial Review

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