Death knell looms for Caltex jobs
The global dance of death could come quickly to Caltex's two refineries after it slashed the value of its refining assets by $1.5 billion due to a confluence of factors strangling profits in this part of its business.
It is another example of Australia's manufacturing going to the wall due to the strong Australian dollar, rising costs and stiff competition from Asia.
The rise of big Asian refineries with an overcapacity of product is turning the screws for local operators and has prompted Caltex management to announce a strategic review of two key refineries of its own - the Kurnell plant in Sydney and Lytton in Brisbane.
And this comes on the heels of Caltex closing one of its petrol-making units at Kurnell last year.
The review was instigated six months ago and is expected to take another six months before investors and customers know the verdict, which could include the sale, closure or further investment in the business.
Given today's writedown of $1.5 billion of assets due to expectations of a prolonged period of pain, the market is expecting the review will recommend closure of at least one of these two plants which convert oil into petrol and diesel.
Indeed, Caltex supplies one third of Australia's transport fuels, so the review will need to make sure it does not adversely impact its customers.
After the $1.5 billion writedown and another $67 million last year, the value of Caltex's refinery assets is now $340 million. About 700 jobs may be at risk at Kurnell alone.
But it shouldn't come as a shock to investors or the government.
The federal government released an energy white paper in December predicting more domestic oil refining plants may fold due to the forces of global supply chains.
It warned that Australia's status as a net importer should not imply an energy security threat. It also calculated that Australian refineries source about 80 per cent of their crude oil from overseas while local units produce around three-quarters of the country's petroleum needs.
The upshot is job losses and a greater reliance on imports. When imports are comparatively cheaper than their Australian counterparts it makes sense but if prices start going up and Australia has killed its refining industry, what then?
Last year Royal Dutch Shell closed the country's oldest refinery at Clyde in Sydney, a facility it had operated since 1928.
The company blamed the decision on the rise of huge refineries in the Asian region, where a surge of new capacity has depressed profit margins in the industry. The move brought into doubt the future of the oil giant's larger Geelong refinery.
The problem is costs are increasing but with the regional overcapacity, margins are being crunched, leaving refineries with few options. Caltex's other businesses, such as marketing and distribution, remain strong.
Today's writedowns by Caltex are likely to be joined by other companies marking assets down because of the strong dollar during the profit season.