How to save the Australian steel industry without tariffs or subsidies

The Port Kembla steelworks and industrial workforce have shaped the character and folklore of the Illawarra.

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Like the 1938 Dalfram dispute, when 150 wharfies refused to load pig iron onto a ship destined for Japan. The 11-week dispute was sparked by the Japanese Imperial Army’s invasion of China. The wharfies knew that every scrap of iron sent to Japan would stoke its imperial war machine. The workers weren’t going to be part of it.

Today the region faces another crisis. Unlike the Dalfram dispute, the concern is not about Australian steel going to China but the stuff coming the other way. Over the last 10 years China has boosted its steelmaking capacity to over 800m tonnes to meet its own needs. That’s half the world’s annual output.

As China’s growth slows, so does its demand for steel. Its surplus of 100m tonnes – 20 times the Port Kembla output – has created massive disruption as it hits the world market. Australian is not immune.

Our two domestic producers – BlueScope and Arrium, which was spun-off by BHP when it exited the steel business – are struggling to compete with cheaper, often subsidised, products. They both operate blast furnaces in Port Kembla and Whyalla respectively.

Many argue that the Illawarra can get along just fine without its heart of steel. I don’t agree.

Some analysts argue that BlueScope would be better if it stopped making steel and concentrated on its profitable coated products division, which produces market-leading products like Colorbond steel roofing and cladding.

I don’t agree. If we lose steel we lose the jobs and the know-how forever.

On the company’s own estimates, 5,000 jobs go from the Illawarra. This is a big hit anywhere, but 9,500 people are already looking for work here. Our unemployment levels are 2% above the national average and have been for most of the last decade.

The economic impact is widespread: contractors, suppliers and every business that relies on the pay cheque of steel workers. A recent University of Wollongong study modelled the impact of a complete closure (something the company is not contemplating) at $3.3bn.

To survive in the long term our Australian steel industry has to be able to compete on both quality and price. Without the subsidies or the scale of many of our competitors, this will not be easy. Despite much of what has been written, BlueScope’s Port Kembla plant is in the middle of the pack when it comes to efficiency, but as a small volume producer it will have to make improvements to survive.

It’s natural for a community like ours to look to elected representatives and government for help. Given that governments have spent over $88bn on regional adjustment around Australia over 10 years, the case for regional-level assistance is easy to make. Government has to assist workers to retrain and redeploy, facilitate new investment build confidence and economic opportunity.

There is also a role for government within the industry but not in the way that some argue.

Tariffs and subsidies are not sought by the company and are not the answer. They only shift the cost or burden from one sector of the economy to another. For steel, it means shifting the cost on to the fabricators (themselves large employers who are exposed to international competition) or the customers, who often decide to buy a cheaper substitute product like plastic gutters and pipes instead of steel, or a wooden fence rather than a Colorbond steel one.

Dumping is a different matter. Governments can and should protect against the practice of dumping subsidised steel into Australian markets, below production costs.

The Anti-Dumping Commission, established by Labor, is understaffed. It should be given the resources required to do its job. As the OECD steel committeepointed out in a recent report, many countries are doing just that.

We can also help Australian steelmakers win government funded projects. Local content rules are being pushed as an option and many of our trade partners themselves require government projects to use domestic steel.

But we shouldn’t kid ourselves. We can’t build a profitable steel company around government procurement alone, which doesn’t use enough steel. According to BlueScope’s CEO, Paul O’Malley, Australian governments purchase up to 300,000 tonnes of steel per year in direct purchasing.

That’s about 30 days production for BlueScope. Useful, but no silver bullet.

The majority of the repair work needs to be done by BlueScope itself. Management need to convince shareholders and financiers that the plan to turn the business around will work.

This requires striking a deal with a workforce that is often sceptical at best. I’ve spoken to many of the workers who cite a string of poor decisions, some going back decades, as evidence of that some of the bosses aren’t up to it. This is not helpful.

These are tough decisions for union leaders, workers, CEOs and governments, but for a region like Wollongong, too much is at stake to let it fail. Australia can and should continue to be a country that makes steel, and Wollongong is the best place in the country for that to happen.

 

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