The major players in the Australian steel industry have more to worry about than a tax on emissions, with a strong Australian dollar and overseas competition squeezing production margins.

Ever since the government first projected assistance to exposed industries as part of its carbon pricing scheme in 2008-9, the steel industry, particularly in manufacturing, has been pushing for protection from offshore rivals. A number of middle-industry steel manufacturers have continued to argue loudly that until offshore competitors are subject to an equivalent price on carbon the government should employ protectionist policies.

Although the general consensus from smaller manufacturers and steel fabrications companies suggests otherwise, the impact of the carbon price has little, almost nothing, to do with the growing prevalence of offshore competitiveness. Rather, a shifting climate within the steel industry is the major concern.

Bluescope Steel CEO Paul O’Malley says that other economic factors had a far greater influence on the evolving structure of the Australian steel industry than the carbon price. In the Grattan Report, O’Malley outlined major financial concerns as “the macro-economic challenges around the high Aussie dollar, high raw material prices and low steel prices — it’s definitely not about carbon”.

The Bluescope CEO is in a far more comfortable position to project confidence with $300 million in government compensation to look forward to.

The cries of regional and middle-size steel manufacturing businesses though have risen out of a concern that government compensation will not be passed on to smaller players but rather directed at investment overseas. Those cries of concern may well be justified.

Bluescope Steel’s closure of blast furnaces at Port Kembla and the axing of more than 1000 jobs was followed by the government fast-tracking its “Steel Transformation Plan”. As a result, Bluescope has had access to $100 million, on condition the company continues to manufacture steel and does not close the facilities permanently.

Meanwhile, overseas, Bluescope opened a 61-acre joint venture with Tata Steel in Jamshedpur, India — under-reported in the Australian media, yet granted wide coverage across Asian news outlets. The venture is a $150 million investment and under the co-operative heading will not be subject to a mineral resources rent tax, a carbon price or expensive labour costs.

According to the Australian Steel Institute’s industry development manager Ian Cairns, taking advantage of cheaper product overseas and investing in more efficient practices is just good business and should normally strengthen the economy. Cairns does, however, appeal to government to put into action local content policies that will place pressure on companies to award major development contracts to the local steel industry.

“The government should be looking to put in place some policies that would put pressure on these companies looking for cheaper overseas alternatives,” he told The Australian in January.

Chinese suppliers in particular are proving most damaging to business for local steel manufacturers. High labour costs, and an undervalued Yuan are undermining local steel manufacturers’ attempts to secure working contracts.

In January, The Australian reported that Perth Miner Gindalbie Metals had imported most of the steel for its $2.6 billion Karara iron ore project in Western Australia from China because the local bids were three times more expensive.

Gindlabie was guilty of favouring its biggest investor, Beijing operated and state-owned steel manufacturer Ansteel, awarding it a profitable contractual agreement for over 4000 tonnes of steel. Following the report and pressure from unions, Prime Minister Julia Gillard vowed to investigate on an international scale and initiate legal action if hard evidence was found to prove that local companies were being excluded from projects due to contractual arrangements with Chinese manufacturers.

Although unions have lobbied aggressively to ensure local manufacturers are given consideration for contracts, there are criticisms that there appears to be minimal economic logic behind the proposed strategies.

The Australian Workers’ Union has pressured the government to enforce measures to increase domestic demand for locally manufactured steel over cheaper imports. One strategy put forward was to increase the use of local product by signing Australian manufacturers to government-run infrastructure projects.

Larger manufacturers, however, are seeking their own solutions to combat an undercut Australian steel manufacturing industry. Manufacturer and miner OneSteel, soon to be Arrium Mining Consumables, is attempting to not only overcome challenges but brush them aside.

Plans to change the name of OneSteel to Arrium signal a new era in the life cycle of the business by furthering its stake in iron ore exports, which now forms a majority of its profits. After repeat losses in its steel manufacturing sector the name change is part of a directive to shift the focus away from steel making to iron-ore exports and create a new association with the brand name.

A half-yearly report from 2011-12 revealed that OneSteel recorded a $75 million shortfall in its steel-making business. According to OneSteel, manufacturing has decreased from 92% of the company’s total value in 2007 to roughly 47% at the start of 2012.

By shifting the focus of the business, OneSteel has withstood the challenges of a strong Australian dollar, increasing iron ore and coal prices, cheaper offshore alternatives and reduced levels of demand locally.

Anticipated increases in costs resulting from the carbon pricing scheme will be offset by a $64 million government payment which will be recorded as “income” in the company’s financials.

OneSteel’s plans to cease operations of an oil and gas pipe factory at Port Kembla in the Illawarra will result in a further blow to employment in the region. OneSteel spokesman Steve Ashe attributed the closure to the strong Australian dollar and weak local demand in keeping with the business line.

“We have kept unions informed of the challenges we’re facing and they’ve been notified of the decision, which included our plans for managing the closure and matters concerning employees,” Ashe told Crikey.

In late 2011 the independent Grattan Institute published a report which claimed the government’s compensation packages were “unjustified and costly”.

The report analysed the effects of a $40 per tonne of CO2 emissions carbon price mechanism, which is significantly higher than the $23 per tonne price that will be enforced in July. Even then, it said the impact on industries like steel would be “negligible”:

“A carbon price with no industry assistance could add to pressures … the government’s proposed assistance is so generous that steel producers will receive an unjustified windfall again.”

The report, produced by Tony Wood and Tristan Edis, asserts that the main idea behind industry protection is to prevent “carbon leakage”, where a price on carbon forces local industry to move offshore with no improvement in global emissions.

Wood and Edis concluded that compensation packages did “not take into account that any exemptions given to these industries shift the cost of reducing carbon pollution onto the whole community”. With specific regard to the steel industry, the report says that it doesn’t believe the government should protect it “at all costs”:

“The Australian steel industry will in part move offshore. Paying a full carbon price increases the risk but is not the primary driver.”

That same sentiment is echoed by a senior representative from Stramit Building Products, who says the major threats are cheaper products from overseas which are making it harder to compete locally, not the carbon price directly.

“The compensation the government is offering produces a neutral outcome,” the representative told Crikey. “The industry largely ends up in positive territory, but if price rises do come they’ll come as a result from increases in ancillary costs in transport, electricity and rent.

“The tax will just become part of the budget. Costs might be passed onto the consumer but the market will absorb the additional expense.”

The carbon price is not the major concern for major steel industry players, but a concern for the minor manufacturers and consumers is the risk of misspent compensation. The government intended for the carbon price to reduce emissions, but with overseas markets refusing to match the price on carbon big polluters are offsetting their taxable pollution into foreign — tax free — markets.

The steel industry has been given a boost to deal with the carbon price but the costs associated with the tax are playing second string to a high Australian dollar, cheap imports and offshore investment — an outcome the government may not have intended.

Peter Fray

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