India COVID crisis could hurt Australian coal, says Orica’s Sanjeev Gandhi
Pressure on India’s government in the face of the severe COVID crisis gripping the country poses fresh risks to Australia’s coal exports, says industry boss.
New Orica boss Sanjeev Gandhi has warned the pandemic crisis in India poses fresh risks to Australia’s thermal coal industry, as the Indian government faces rising pressure to impose a national lockdown to control the wildfire spread of COVID-19 in the country.
The explosives maker is heavily exposed to both thermal and metallurgical operations in its Australian business, and India is a major customer of Australian mines having taken up additional shipments on the back of China’s bans on Australian coal.
Orica’s earnings slumped in the first half of its financial year, with underlying earnings down 51 per cent to $152m compared to the first half of its last fiscal year. After tax profits fell 54 per cent to $77m.
The turmoil caused by China’s coal bans sent coal prices tumbling in 2020 until shipments were rerouted to other markets, and lower volumes of coal exports also impacted Orica’s explosives business, the company said.
While Orica expects volumes to recover in the second half of its financial year, Mr Gandhi warned India’s rampant coronavirus outbreak – the country has reported more than 300,000 daily COVID-19 cases for 21 consecutive days – could hurt thermal coal exporters if the developing nation’s economy is damaged.
“My concern is that with 300,000 plus new cases of COVID-19 every day, this is not going to turn overnight. This is going to have a sustained impact on India, and on manufacturing, on energy consumption, on electricity and all of that. And this could have adverse impacts on coal consumption,” he said on Thursday.
Orica slashed its earnings outlook for the year in February as it announced the departure of Alberto Calderon as its chief executive, blaming trade tensions between Australia and China and COVID-19 ructions for denting demand for thermal coal.
On Thursday the company said it had booked after-tax profits of $77m for the six months to the end of March, down 54 per cent on the same half last financial year, with underlying earnings before interest and tax of $152m, down 51 per cent.
The company declared a 7.5c a share dividend, compared to a 16.5c a share interim payout last year.
Revenue for the half fell 9 per cent compared to the six months to the end of March 2020, with underlying EBITDA down 25 per cent to $362m.
Orica said its operations generated $158m in net operating cash flows in the period, up 46 per cent on the first half of last financial year, and had cut its capital spending by 45 per cent to $152m.
The explosives maker said it finished March with net debt of $1.7bn, and a gearing ratio of 35.4 per cent.
Ammonium nitrate volumes, excluding tonnes sold by its recently acquired Exsa business, were down 9 per cent for the half, largely as a result of the impact of the pandemic Asia, Latin America, Europe and the Middle East.
“Social unrest in Peru and strikes in Chile further impacted product volumes and services activity in Latin America. Australian trade tensions with China affected the high margin thermal coal market on the Australian East Coast. This was offset by increased volume from iron ore customers in the Pilbara region at lower margin,” Orica said.
Orica also said it had launched a sales process for its Minova business, which supplies chemical and mechanical ground control solutions to the mining, civil construction and tunnelling industries.
Minova booked sales revenue of $219.1m in the first half, down from $263m, and EBIT of $7.2m, down from $11.1m.
And, amid a wider review of Orica’s manufacturing businesses, including its east coast ammonium nitrate plants, Mr Gandhi sounded a fresh warning about high gas prices, saying Orica was seeing few signs cost of gas to its operations would fall, despite the federal government’s focus on the manufacturing sector as a means for the economy to recover from the pandemic.
“It‘s quite disappointing that so far we’ve not had the anticipated relief that we would have expected out of the new gas price mechanism,” he said.
“We are engaging with our gas suppliers, but I don’t foresee any short term relief there. So that is why it’s going to be very, very important to continue that discussion together with the support of the authorities here.”
Mr Gandhi said pressure was mounting on Orica to consider the future of its Australian manufacturing plants, although he said the company was unlikely to make any significant decisions about their long-term future in the immediate term.
“Obviously my shareholders are asking us what I am doing with my margin decline in terms of business running in Australia, and gas is a key contributor to this,” he said.
“So I have to take some action. And so we will start work. But I’m still hopeful that the manufacturers of gas and the consumers of gas will come to a reasonable arrangement there, which will allow the long term sustainability of manufacturing here in Australia.”
Orica shares closed down 8c, or 0.6 per cent on Thursday, at $13.33.