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Why the Adbri share price is crashing 26% lower today

The Adbri Ltd (ASX: ABC) share price is on course to end the week in a very disappointing fashion.

In morning trade the building materials company’s shares have crashed as much as 26% lower to $2.32.

Why did the Adbri share price crash lower?

This morning Adbri, formerly known as Adelaide Brighton, released an announcement relating to its lime supply contract with Alcoa of Australia.

According to the release, Adbri’s subsidiary, Cockburn Cement, has been informed by Alcoa of Australia that it has decided against renewing its current lime supply contract when it expires on 30 June 2021.

This is a bit of a blow for Adbri, given that the contract currently constitutes approximately $70 million in annual revenue.

For the 12 months ended 31 December 2019, Adbri’s revenue from continuing operations came in at $1,517 million. This means this contract represents 4.6% of its total revenue.

Management notes that this non-renewal is not expected to materially impact its revenue until post June 2021. In the meantime, it will quickly evaluate and take necessary mitigating actions.

As a result, at this stage it has warned that it is not possible to quantify the full financial impact of the non-renewal.

The company’s CEO, Nick Miller, was disappointed with the non-renewal but remained upbeat on the future.

The chief executive commented: “We are disappointed with Alcoa’s decision to displace locally manufactured product with imports from multiple sources, particularly considering our almost 50-year uninterrupted supply relationship. We will work quickly to mitigate the impact on local jobs supporting our lime business and we remain committed to supplying our WA resources sector customers.”

Foolish Takeaway.

This non-renewal is certainly a blow for Adbri given its long-standing relationship with Alcoa.

And while the loss of 4.6% of total revenue may not appear to be worth a 26% decline in the Adbri share price, I suspect investors are concerned that other customers may ultimately switch to cheaper imports in the future.

This could mean the company will have to reduce prices, at the expense of its margins, in order to remain competitive in the coming years.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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