Explosives investment signals demand belief

AUSTRALIA’S two major ammonium nitrate producers are punting $1.3 billion that the mining boom has enough legs to justify their investment in new production capacity.

Wesfarmers, through its CSBP subsidiary, is investing $550 million expanding the production capacity of its Kwinana ammonium nitrate plant.

Norwegian company Yara and its joint venture shareholder Orica, along with their minority partner Apache Energy, are making an even bigger investment – $US800 million – in a new plant in the Pilbara.

Orica managing director Ian Smith has no doubt the market will expand to absorb the plant’s production of 330,000 tonnes per annum.

“We think there is a very strong market, that is a growth opportunity for us,” Mr Smith told a business lunch in Perth hosted by The Australian Financial Review and Macquarie Bank last week.

Mr Smith said when the plant comes into full production in 2015 or 2016, iron ore production in the Pilbara will have grown to 800 million tonnes a year.

He was buoyed by the fact that, over the past 30 years, demand for ammonium nitrate had consistently grown even faster than production by the mining sector.

Mr Smith added that most of the plant’s output was already contracted, three years out from full production.

“The plant will be in excess of 300,000 tonnes when it comes into full production. We’ve already got contractual arrangements in place where we can place 200,000 tonnes,” he said.

Mr Smith said the ammonium nitrate plant wasn’t Orica’s only investment in Western Australia’s north. 

“We’re also building an (ammonium nitrate) emulsion plant in Port Hedland with 40,000 tonnes of storage, so we’re actually moving into the north-west of Western Australia for the long term.”

This will be the first bulk emulsion plant in the Pilbara.

For Orica, the investment in the Pilbara plant reflects an effort to remedy its underweight position in the iron ore sector and the north-west.

Mr Smith said while Orica holds 50 per cent of the national explosives plant, the iron ore sector accounts for just 3 per cent of its earnings.

The ownership of the new ammonium nitrate plant will be split between Yara (45 per cent), Orica (45 per cent) and Apache (10 per cent).

The plant will be built alongside Yara’s ammonia plant on the Burrup Peninsula.

Formerly known as Burrup Fertilisers, the ammonia plant is owned by Yara (51 per cent) and Apache Energy (49 per cent).

The Pilbara ammonium nitrate plant is part of a larger Australian and international expansion program for Orica.

It is in the process of commissioning a 300,000tpa plant in Indonesia and is pursuing expansion of its Kooragang Island ammonium nitrate plant in NSW, to 750,000tpa, one year after a chemical leak caused the shutdown of that plant.

In contrast to Orica and Yara, WA has always been Wesfarmers’ home market.

The $550 million expansion of its Kwinana ammonium nitrate plant will lift its capacity by 260,000tpa to a total of 780,000tpa.

Wesfarmers managing director Richard Goyder has previously stated that the company has negotiated offtake agreements covering the majority of the additional production capacity at the Kwinana plant.

Mr Goyder has also acknowledged that production capacity will exceed demand until about 2020.

“Our ability to divert surplus ammonium nitrate into CSBP fertiliser products should allow us to maximise production in the early years,” he said late last year.