Sector News

Israel Chemicals to close magnesium factory, fire 550 workers

September 9, 2014
Chemical Value Chain
Israel Chemicals (ICL) announced plans on Thursday to close its magnesium factory in 2017 – which employs 550 people, about 10 percent of the company’s total workforce – and explore plans to downsize its bromide plant, which employs another 1,200.
 
The company cited the possibility that “interim recommendations of the Sheshinski Committee will be adopted and enacted into legislation” as reasons for both.
 
The so-called Sheshinski 2 Committee, headed by Prof. Eitan Sheshinski, was instructed by the government last year to examine the state’s royalty policies for the exploitation of natural resources – except for oil and gas, whose royalty policies were determined in a previous Sheshinski Committee.
 
In May, Sheshinski 2 recommended that companies exploiting the country’s natural resources be charged a tax rate on all excess profits – also known as a surtax – of 42 percent, stressing that such a tax would boost the state’s coffers by NIS 500 million annually.
 
The committee members also recommended setting a uniform royalty rate on natural resources of 5%, to remain consistent with global conditions and ensure a steady revenue stream.
 
ICL, which is the Negev’s largest employer and one of the largest companies traded on the Tel Aviv Stock Exchange, said the magnesium factory had barely been profitable for a long time (it pulled in $1m in gross profit from $115m. in sales in 2013) but was economically justifiable because it produced cheap inputs for use in its bromide and potash plants.
 
As a result, the Sheshinski recommendations would not directly affect magnesium production.
 
The company did not explain how cutting into its other profits would make it more lucrative to close the magnesium plant and buy the necessary materials on the open market, but simply said that “net value of the synergies has declined due to the increase in the tax burden on production.”
 
Earlier this month the company decided to nix already approved investments worth some $750m. and reconsider another $1 billion worth of investments in its Israeli operations.
 
That decision, it said, was also based on the prospects of Sheshinski moving forward.
 
Regarding the Israel Chemicals subsidiary Dead Sea Works specifically, the Sheshinski 2 members recommended applying the terms only on January 1, 2017. Until then, they suggested that the royalty rate remain in accordance with the agreed upon figure for 2012 – 10% royalties for any amount of potash in excess of 1.5 million tons.
 
The first Sheshinski Committee, whose recommendations received Knesset approval in March 2011, determined a new taxation method strictly for the exploitation of hydrocarbons.
 
While that legislation elected to keep gas and oil royalty rates intact at 12.5%, it increased profit levies initially to 20% and enabled them to eventually rise to 60%.
 
During the May meeting, Sheshinski 2 Committee members reviewed a report drafted by the International Monetary Fund, which determined that Israel’s taxation model on natural resources involves one of the lowest public profit shares in the world – standing at 23% for mineral mining and 50% for hydrocarbons.
 
The committee members recommended that the tax rate be calculated according to a model based on profit reports and accounts of losses, collected only after the company ensures a rate of return of 11% on its assets.
 
Raising the surtax to 42% would likely increase the portion of the rate that the public receives by a margin of 46% to 57%, the committee members said.
 
Upon hearing the recommendations in May, Israel Chemicals responded by freezing an investment program worth more than $1b., protesting that the high taxes would reduce its competitive edge globally. At the time, the company said that such changes would necessitate cost-cutting and layoffs within the firm.
 
On the opposite end of the spectrum, the organization Adam Teva V’Din (Israel Union for Environmental Defense) has criticized the 42% surtax as “extremely low” and would not allow the public to enjoy a full share of the country’s natural resources.
 
Representatives of ICL once again appeared before members of the Sheshinski 2 Committee on August 4, arguing that it had not recommended a fair rate of return. Rather than 11%, the rate of return should amount to about 22%, the company said. The ICL executives argued that the committee members erred in their calculations of the company’s asset base used to determine the rate of return, from which the surtax rate was also derived.
 
Slamming the committee members for formulating their taxation model based only on ICL’s potash production in the Dead Sea, the executives stressed that they produce a variety of other resources, such as bromine, magnesium and phosphates. They claimed that each one of these natural resources should be independently evaluated.
 
Accusing the committee’s judgments of lacking neutrality, the company representatives said during the August 4 meeting that the approval of these recommendations “would force ICL to reexamine all its investments in Israel and, unfortunately, to reallocate planned investments from Israel to other countries.”
 

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