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NZ Refining aims to shrink workforce, squeeze yields as global over-capacity hurts margins

Friday 23rd August 2013

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New Zealand Refining plans to shrink its workforce by 8 percent by 2014, cut costs via new electricity and gas supply contracts and boost its hydrocracker yield in the face of 'systemic discounting' from larger refineries in South Korea and India.

New Zealand's only oil refinery lifted its gross refinery margin (GRM) to US$5.27 a barrel in the six months ended June 30, from US$4.36 a year earlier. That's still below the average GRM of $5.77 a barrel achieved in full-year 2012 and US$6.11 in 2011 and chief executive Sjoerd Post margins will remain under pressure as global capacity continues to outpace demand.

"Refining is big capital, long lead time," Post told a briefing in Wellington. The industry is only now seeing the impact of decisions to increase capacity that were made before the global financial crisis and in the current environment "is quite unnecessary. That will stay like that for the foreseeable future."

As part of its efforts to contain costs, its workforce will be shrunk to 517 by 2014 from 562 at the end of June. Much of this will be contractors completing projects and natural attrition, Post said.

It is aiming to cut total costs to $158 million in2014 from $169 million this year, with nothing regarded as off-limits. "I won't be taking the Harvard Review any more," Post said.

The company is trialling innovations including the use of ammoniation of its hydrocracker unit to slow the cracking process and lift its 'middle distillate yield', which it forecasts may lift annual revenue by $3 million. It will also increase the use of natural gas to run its heating plants, allowing more of its own waste streams to be turned into saleable products.

Post said analysts refer to his company's "two wild horses" - the exchange rate and the Singapore margin that its processing is benchmarked from. "But we can manage our costs, our efficiency."

"Refining isn't a business you should throw money around," he said. "You should be essentially Scottish about it."

He declined to identify which power companies would be used to supply electricity and gas but confirmed there would be a new supplier.

NZ Refining has to balance the needs of its major shareholders - the companies that dominate New Zealand petroleum retailing and want to pay the least for refined product - against those of its minority shareholders, Post said.

He compared the Marsden Point refinery, which is investing $365 million in a new continuous catalyst regeneration platform (CCR) to lift capacity, to the GS Caltex Yeosu refinery in South Korea, which is spending US$3 billion to expand and already exports to 20 countries.

"They have a huge unit cost advantage," he said.

NZ refining today reported profit of $5.3 million for the six months ended June 30, from a loss of $2.4 million a year earlier, when its refinery margin shrank and the high New Zealand dollar eroded its processing fee revenue. Sales rose 12 percent to $126 million, the Marsden Point-based company said in a statement.

Processing fees, the largest contributor to the company's operating revenue, rose to $93.9 million in the latest half from about $78 million a year earlier.

While the company's margins continued to improve in July, the recovery isn't expected to be sustained.

The shares rose 1.8 percent to $2.29 on the NZX today, and have declined 11 percent this year.

NZ Refining will pay a first-half dividend of 2 cents a share, unchanged from a year earlier.

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