Committee Reports > List of Committees > Joint > 1981 > Committee on State Sponsored Bodies > Report No. 16 - Nitrigin Eireann Teoranta

APPENDIX 6

MEMORANDUM FROM NÍTRIGIN ÉIREANN TEORANTA

ARKLOW GYPSUM LIMITED

INTRODUCTION

This memorandum is in response to the written request from the Committee dated 11th September, 1980. Three sections are included here. The first covers information on the specific points as requested. In the second section further information is given to more fully, inform members of the Committee on the situation. Finally, in the third section, comments are made on the submission by the Unions to the Committee of 3rd September, 1980.

1.(a) Feasibility Study.

This was completed and submitted to the NET Board in February, 1973, and a decision to proceed was taken in April, 1973. Authorisation for the IDA Grant was received at that time. A total investment of £2.7m was proposed with a return on capital of 18.5%, a DCF return of 21% and a pay-back period of 4.4 years. “Breakeven volume” was predicted at 62% of Plant Capacity. Inflation was not taken into consideration, i.e. it was assumed that the prices of raw materials, services and personnel would inflate at the same rate as product price.

A sensitivity and Risk Analysis was also included. It showed the project to be particularly sensitive to product price.

NOTE: Some 60% of the projected capital expenditure was in the form of a Deutschmark Fixed Price Contract for Plant & Machinery, in staged payments. A doubling of the value of the DM through the life of the project was the main factor in raising the eventual capital cost to £3.7m.

(b)Nature of Controls During Construction Period.

The feasibility calculations were repeated at intervals through the various stages of the project, and showed a progressively deteriorating situation. By 1979, a break-even situation could no longer be projected. However, at this and all earlier stages the capital sums being largely irretrievable, the enterprise was kept going on the basis that a cash breakeven situation net of all financial charges was now being predicted. By early 1980, the economic climate had so worsened that even cash flow projections were negative.

(c)Selection of Contractors:

In a contract of this nature the client is, for all practical purposes, limited in his choice of contractor to those with the relevant know how; who offer these services only as managing contractors. They then carry out design work, procure equipment, and subcontract erection.

Three such contractors were available to tender as follows:—

(i)Babcock BSH—a German Company offering a combination of their own Plasterboard know-how and Plaster technology from another Germany Company—Giulini.

(ii)APV Mitchell—a British Company offering Japanese technology from the Yoshino Company.

(iii)Lummus—an American Company offering technology from the Ersham Company. Lummus was eliminated early on due to their lack of know-how on Chemical Gypsum plus excessive price.

The Babcock BSH and APV Mitchell tenders were parallel in price and the choice was therefore to be made on the judgement of their technology and of their ability to convert it into a working plant at Arklow. In this a number of factors had to be weighed up.

The British Company were offering proven technology, but there was a doubt on their ability to successfully transfer the know how from the Japanese to the Arklow situation.

The Germans were offering a conventional Plasterboard Plant, but the plaster to be used (“alphaplaster”) would be of a type not previously used to make plasterboard. Also, the plant to convert the raw material gypsum into this plaster was an adaptation of a Giulini owned plant. NET’s reservations in this area were met by means of a full scale test where, 100 tons of gypsum from Arklow was first processed into plaster on the Giulini Plant in Germany, and subsequently converted into Plasterboard on a Babcock-BSH built plant in Yugoslavia. The Germans were awarded the contract.

Babcock BSH subsequently sub-contracted Civil and Mechanical erection to the Irish Engineering & Harbour Construction Co. Ltd., (Irishenco), and Wm. Press, respectively.

(d)Construction Problems:

The original contract date for mechanical completion was December, 1974 with commissioning to take place during the early part of 1975. In the event, commissioning proper did not get underway until early 1979, and the following is a summary of the intervening period.

Mechanical completion was delayed until November, 1975 due to contractor design delays and late delivery of equipment.

At that point a major component—the Autoclave—failed on its initial pressure test. This item—a specialist pressure vessel was supplied by a very reputable German engineering Company. Such failures are rare in the industry but are never entirely absent. The supplier replaced the item at his own cost but the project was, as a result, put back a further 14 months, to early 1977.

Attempts at commissioning in 1977 now revealed major equipment selection and design faults in the Preparation Plant, i.e. the part of the factory which converts the Gypsum to “Plaster”. One major filtering system had to be abandoned and replaced by a unit of different design, at the expense of the Contractor.

Attempts at full scale commissioning in 1978 were bedevilled by multiple equipment failures and shortcomings on both plants. As the contractor was unable to resolve the problems, NET Research and Engineering Departments were drafted in to join the AGL Technical personnel. Fundamental changes in production methods were made and the work was showing fruition in terms of production when the NET strike of October 1975 cut off raw material supplies.

The plants restarted in March, 1979 and commissioning proper got underway.

(e)Market Projections:

The original projected breakdown was as follows:—

During the construction period the advance of the DM ruled out the German market on price. It then became possible to sell in the Belgian market and Belgium thus replaced West Germany in subsequent plans.

2. FURTHER INFORMATION

(a) The Genesis of the Arklow Gypsum Project:

When installing a Phosphoric Acid Plant in Arklow in 1966, NET had been careful to choose a process which produced a grade of by-product gypsum suitable for further processing, to keep the options open in that direction.

Natural Gypsum had been mined in great quantities all over the world. At the same time similar quantities of chemical by-product gypsum were being dumped causing increasing problems. Technology had now been developed to process this chemical gypsum and plants had been commissioned for this purpose in Japan and Germany.

NET saw an opportunity to use a raw material which would otherwise be dumped to sea off Arklow to create a viable industry with consequent employment. Inevitably, such enterprise must include the risk of failure, which unfortunately, in this case, has come to pass.

(b) The Basis for the Shutdown Decision:

The decision of the NET Board of Directors to shutdown Arklow Gypsum Ltd. centres around the fact that the best projections for Arklow Gypsum show continuing losses into the future. The following is the essential data on which the decision was made:—

Notes:

The above projections were prepared in June, 1980, and represent the best that could be achieved on the basis of “nothing going wrong”. Since then the economic climate has worsened further and a projection prepared today would show a further major deterioration with no prospect of ever showing a positive cash flow. Furthermore, substantial technical problems remain to be solved in the area of plant stream factor.

(c) The Change in the Commercial Situation over the Life of the Project:

In the above projections, the performance of the factory is taken as reaching, in 1981, the capacity and efficiencies as originally projected for the project. Yet no approach to profitability can be projected. Whereas, non-performance of the factory over the years was the prime cause of the accumulated losses, the gross deterioration in present projections over the original ones is primarily a reflection of the Product Price/Raw Material Cost ratio.

In the period 1973 to 1979 the cost of raw materials escalated by a factor of 4.3. (Included in this is an energy factor escalation of 12.0). In the same period the prices obtainable over the markets in question increased by a factor of only 2.5. The new situation was that over 100% capacity had to be produced and sold to reach breakeven.

During this period some Plasterboard Manufacturers in Europe did not survive, and were swallowed up by the larger groups. Those who did survive did so by means of:—

(i)Achieving economy of scale by upgrading individual plant capacity, and running fewer plants.

(ii)Quickly developing technology to cut-down on use of raw materials, particularly energy and paper.

(iii)Diversifying into more profitable related products, making it possible to accept considerably reduced profits on Plasterboard.

From early 1979 to early 1980 the situation further deteriorated. Energy costs increased by over 100% with costs overall going up 30%. This was partly covered in the Home Market by price increases and in the UK market by the strengthening Sterling. In Belgium, however, a total price increase of only 3.7% ruled out that market for future trading.

(d) NET Decision Making Over the Period:

The decision to proceed with the Arklow Gypsum Project was made in April, 1973, i.e. just before the first “oil crisis”. The bulk of the capital was committed in late 1973 early 1974 during which time the commercial scenario as described had not yet developed.

Thus, once the capital was already invested, the project was worth persisting with as long as a positive cash flow situation could be projected. In this situation, NET could even envisage making temporary cash losses and writing them off. Once the point was reached where continuing large cash losses were being projected, then shut-down was inevitable. This is what transpired by the beginning of June, 1980.

(e) The Prospects for Sale of the Factory:

From all the above the only chance of saving some employment was to find a prospective purchaser of the factory who would have significant advantages to bring to bear on the situation in terms of production technology, purchasing power and marketing.

One firm-Rigips Ltd., Germany, were interested enough to do a full investigation, but have recently indicated their unwillingness to invest. They see the prospects of profitably operating the present set-up, even with whatever advantages they could bring to bear on the situation, as remote.

The best they could suggest is that, firstly, a further £2.5m capital should be invested on equipment to reduce operating costs. They would then consent to supply management and technical know-how to the enterprise for a fee, and would require a guaranteed supply of product at an “economic” price.

This situation has now been passed over to the IDA.

3. COMMENTS ON UNION SUBMISSION

A number of points in the Union’s submission are not accurate. In correcting them here, the NET management are entirely satisfied that there was no intention on the Union side to mislead in questions of fact. Nevertheless, it is necessary to put the record straight as follows:—

(a)The total expenditure incurred by NET in respect of Arklow Gypsum Ltd. up to 30th June, 1980 was as follows:—

(b)Whereas the figures given to the Unions which are in line with those in this memorandum show somewhat decreasing losses into 1981, the conclusion cannot be drawn that further reduction in losses would occur in succeeding years.

(c)The possibility of using natural gas is too remote in time to be included as a factor. The reference to waste gas from NET is also only a remote possibility somewhat in the future. In either case the resultant saving would not be sufficient to affect the issue.

(d)The decision to close-down Arklow Gypsum Ltd. was made on the results and projections available. It is not true that if Arklow Gypsum Ltd. had not been a part of NET, that it would have had a better chance of survival. To the contrary, the scale of NET’s operation allowed the Arklow Gypsum Ltd. operation to continue way beyond the point of Commercial viability.

September 1980

*The cost of Working Capital is not included here.

**Financial charges in addition to those shown here of £800,000 are being borne by NET.