The Australian reported that the head of Wesfarmers' chemicals division Mr Tom O'Leary has cast strong doubts on forecasts used by rival Orica to justify an USD 800 million investment in a new ammonium nitrate plant in the Pilbara, declaring that mining industry demand for the key explosives ingredient would be fully satisfied from 2014.
Mr O'Leary said that Orica's entry into the Pilbara could lead to the market for explosives grade ammonium nitrate being oversupplied well beyond 2020. He warned this could affect pricing and returns, leading Wesfarmers' CSBP to possibly examine selling its product in NSW's Hunter Valley or overseas.
Mr Orica said last week that it believed Pilbara iron ore production would grow at a compound annual rate of 10% until 2020. The prediction underpins its move, along with partners Apache Energy and Yara International, to build a 330,000 tonnes a year ammonium nitrate plant on the Burrup Peninsula by 2015.
The investment came just months after the Wesfarmers board approved an AUD 550 million expansion of its own ammonium nitrate plant at Kwinana, south of Perth. The expansion, due to be completed by mid 2014, will boost production by 260,000 tonnes a year.
Orica's entry into the Pilbara market is seen as significant because it may be able to lure customers away from Wesfarmers due to a freight advantage it will gain from producing ammonium nitrate so close to the Pilbara's mines.
Wesfarmers currently supplies Rio Tinto, BHP Billiton and some Fortescue Metals Group mines in the Pilbara region.
Speaking at Wesfarmers' strategy briefing day, Mr O'Leary dismissed Orica's projections, saying he expected annual compound growth in Pilbara iron ore production of about 6% until 2020. He said Orica's forecasts were based on assumptions that nearly all iron ore projects, including BHP's outer harbor project at Port Hedland, would go ahead. He said that "We don't expect all of those projects to proceed and neither do any of the market forecasters. If Orica proceeds there will be significant oversupply in the market until well beyond 2020."
Orica's main local rival, Incitec Pivot, has questioned the economics of building a plant in the Pilbara, saying the excessive costs of building there made it more competitive to produce explosives elsewhere and transport them to the region.
Mr O'Leary said Wesfarmers had considered both the Pilbara and Kwinana for its capacity expansion but had decided the Pilbara was too expensive.
Its analysis included detailed freight studies but the company had concluded it would be able to service customers in the Pilbara, the Goldfields and the emerging Mid West region more efficiently from Kwinana.
Source - The Australian
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