Adbri contract with Alcoa cut short amid WA lime review

Adbri’s struggling lime business in Western Australia has taken another hit, with a major contract to supply alumina major Alcoa cut short.

Adbri’s Munster lime production plant south of Perth.

Adbri’s struggling lime business in Western Australia has taken another hit, with a major contract to supply alumina major Alcoa cut short.

The building materials supplier, which is looking to tie up a $2.1bn buyout from Irish giant CRH, confirmed on Wednesday that the contract to supply quicklime to Alcoa would expire at the end of April, six months earlier than originally planned.

Adbri told investors the contract between its Western Australian lime business, Cockburn Cement, and Alcoa, was amended to “cater for changing demand”.

It comes as Adbri undertakes a review of its Western Australian lime operations in the wake of Alcoa’s recent decision to curtail production at its Kwinana refinery, which was a major consumer of quicklime in the state.

Adbri previously supplied to three Alcoa alumina refineries in Western Australia, but that was cut to just one - the Wagerup facility 150km south of Perth - in 2021.

The company commenced its “optimisation review” in the first half of 2023, amid sliding demand from the alumina and mining sectors.

Options being considered include changes to production levels at the company’s Munster lime plant south of Perth, establishing a lime import facility at Munster, and development of excess land at the 218ha site, which has been earmarked for industrial use.

In a statement to the ASX on Wednesday, Adbri chief executive Mark Irwin said the Western Australian lime market remained “important” to the company, and it was “taking steps to ensure we are aligned with the needs of our customers”.

“An ongoing lime operations review has identified a number of opportunities for Cockburn Cement. This includes the potential to adopt a hybrid supply model, which may involve a mix of locally manufactured product and imported lime, enabling us to deliver additional product grades to the marketplace,” he said.

“We will investigate the feasibility of this model within the footprint of our Munster facility, utilising existing infrastructure such as silo and storage facilities, while continuing to leverage the site’s valuable rail access.”

The Munster facility is one of the country’s largest lime production plants.

Adbri will cease cement production at the site by the end of this year as part of a consolidation of its Western Australian cement operations at its Kwinana facility, which is undergoing a near $400m upgrade.

The company kept dividend payments on hold last month to reduce debt and to pay for upgrades at Kwinana, where costs have blown out due to inflationary and supply chain pressures.

Adbri’s underlying EBITDA rose by 31 per cent to $311m in the 12 months to December, on a 13.1 per cent increase in revenue to $1.92bn, as the company benefited from higher prices and strong demand for most of its materials.

However lime production fell 3.3 per cent to 822,000 tonnes in 2023, and the company flagged in its full-year results announcement that volumes were likely to slip further this year.

On Wednesday the company said the contract change with Alcoa would result in lower lime volumes “in 2024 and beyond”.

However, it expects demand for other products - including cement, concrete and masonry - to be in line with 2023, with “pricing and cost discipline to support margin expansion”.

Adbri last month agreed to a $2.1bn takeover by Ireland-based building materials company CRH, entering a scheme implementation deed, under which CRH would acquire all of the shares that major shareholder the Barro Group doesn’t currently own.

CRH launched the $3.20 per share offer in December, with backing from Barro Group, which controls a 42.7 per cent stake in the company.

Shareholders will vote on the deal in May or June.

Adbri shares were trading steady on Wednesday at $3.13.