A day after posting a 34% jump in earnings, which saw the share price jump 8%, chemicals and explosives manufacturer, Orica (ASX: ORI) has updated the market on how heightened military demand for critical explosive inputs has made it difficult to keep operations running.
Due to the war in Ukraine – which triggered a global explosives shortage - CEO Sanjeev Gandhi revealed the full knock-on effect from the loss of Ukraine's supply [of TNT] - a critical input for its mining and infrastructure operations – in fulfilling North American orders.
On an earnings call yesterday, Gandhi highlighted the difficulties for Orica, the world’s largest manufacturer of commercial explosives and blasting systems - accessing critical inputs now that Ukraine - one of the world’s largest suppliers of TNT before Russia’s invasion – is no longer supplying.
Scramble for supply
“Civil explosives companies are competing with the ordinances factories to source trinitrotoluene (TNT) because the same TNT goes into armaments as goes into our boosters,” Gandhi said.
Elaborating on the acuteness of supply issues in North America over the past six months, Gandhi told the market that Orica was forced to invoke "force majeure" clauses in its systems contracts.
“We did not short our customers, but we were obviously running hand to mouth in terms of getting our supply chains running there,” he said.
As a result, Orica’s North American sales declined 1.4% in the six months to 31 March, while Latin America saw an even bigger contraction, with revenue falling 15%.
Added to supply disruptions at its North American business were issues experienced at its ammonium nitrate Carseland plant in Canada.
Upside for North America
U.S. President Donald Trump’s plan to unleash mining under the “Fast 41” policy to hasten approvals, has given Gandhi cause for renewed optimism about the state of the North American market.
It’s understood that the White House initiative has already triggered nearly 20 new projects.
“And if these get realised, which I guess they will because [commodity] prices are still high, that should mean strong demand for our products and services in the United States,” Gandhi noted.
Strong global demand
In the face of heightened global volatility, Gandhi also reassured the market that customer demand remains strong, especially from national infrastructure projects and mining projects.
While Gandhi can’t foresee any slowdown in Australia or Africa and Asia, he’s witnessed an interesting uptick in Western Europe.
“… there seems to be more interest in investing in infrastructure. It’s a little bit defence-driven, but the rest is just old ageing infrastructure in the EU.”
Solve EC gas shortage
Turning his attention to gas, Gandhi joined other major manufacturers, BlueScope Steel in calling on the new Labor government to reconsider it policies to ensure there’s sufficient supply for domestic users.
Gandhi's thinking is focused on the lack of any credible safety net policy to cater for repeated warnings from officials over potential gas shortages during peak conditions.
“I am concerned over the shortfall of gas, and I am concerned over the timing of availability of gas,” Gandhi said.
“We need uninterrupted supply so we need gas 24/7 and 365 days because my manufacturing sites work all the time and never stop.”
Gandhi said interruption shortages lead to temporary shortages, higher costs, safety issues and supply chain interruption.
Meanwhile, last year Labor pledged gas as a key energy source through to 2050 and beyond, and play a critical role in helping Australia meet its net zero target while providing cheap and reliable power.
One of the world’s largest manufacturers of commercial explosives and blasting systems, Orica makes ammonium nitrate – a key input in explosives – at facilities in NSW, Qld, WA, North America and Indonesia.
