An Incitec echo to BCA's productivity plea

Incitec Pivot's decision to build overseas dovetailed nicely, but not perfectly, with today's Business Council call for a more productivity-conscious political debate.

It was, presumably, pure coincidence that Incitec Pivot chose to announce a $US850 million new ammonia manufacturing plan in the US on the same day that the Business Council’s Tony Shepherd made an appeal to put short termism and politics aside to pursue the long-term national good.

Incitec, which generated about two-thirds of its sales from its Australian operations last year, chose to locate the new plant in the US for a number of compelling reasons but there is little doubt that the US is a more attractive place to locate an industrial plant today than Australia.

The combination of the post-financial crisis recession and the shale gas revolution has transformed the US into an economy with low energy costs and relatively low labour costs. It’s also not an economy stifled by red and green tape.

In the States they now talk about re-shoring – the return of large slabs of manufacturing that had previously been offshored to China and other developing countries. The Incitec decision tends to illustrate that newfound competitiveness in the global contest for investment.

Conversely, Shepherd was bemoaning the poor environment for business in this country and the lack of long-term thinking and planning and policies to lower costs, lift productivity, improve competitiveness and strengthen the national finances.

The BCA has been developing a long-term vision and recommendations for action in response to what it, and business generally, sees as highly-politicised policy positions from the major parties and – in this seemingly endless lead-up to the federal election – politics-driven, poor-quality, anti-business legislation and unsustainable/unfundable policies from the Gillard government. (Not that Shepherd put it quite that crudely).

The Incitec decision wasn’t solely about the relative merits of investing in the US rather than Australia but does illustrate the choices businesses have about where to invest and the reality that the strength of the dollar, soaring costs, poor productivity, a rising tide of regulation and a pro-union and anti-business industrial relations environment is making it harder to invest new capital here.

While Incitec did cite competitively-priced energy, labour productivity and a ‘’responsive’’ regulatory environment as factors in its decision, the particular opportunity to locate the plant in Louisiana was a unique one. The site where the plant will be built is a brownfields site with access to existing logistics and storage infrastructure.

Moreover, with the US the largest importer of ammonia and Incitec’s own Dyno Nobel the largest explosives business in the US there is an obvious strategic and market logic to building the plant there and creating a more integrated US business that leverages off the access to low-cost gas. Ammonia is also the sweet spot in the ammonium nitrate value chain.

Incitec itself will take 300,000 of the plant’s planned 800,000 tonnes a year output and has already struck off-take agreements with two US companies – one of which has a chemicals plant adjacent to Incitec’s planned facility – that cover the remaining production.

Incitec says the investment will have a payback of less than five years and a 15 per cent internal rate of return. One suspects that there wouldn’t be too many large-scale manufacturing investments in Australia today where the same could be said.