If manufacturing dies in Australia gas policy will be guilty of murder
According to the Australian Securities and Investments Commission (ASIC) 1400 Australian manufacturing companies have collapsed in the past two years and the industry appears to be in terminal decline.
By the end of last year Australia had the lowest manufacturing share in the OEDC, and manufacturing contributed only 5% of value to the nation’s economy.
This is down from close to 15% in the 1970s.
A major cause of the calamity is soaring energy costs along Australia’s east coast, where the price for liquid natural gas (LNG) used to generate electricity has tripled in the past 11 years, because gas producers have been able to get high prices for as much exported gas as they can deliver.
Thus, to ensure supply, Australian manufacturers must either pay whatever overseas manufacturers are paying or consider shutting down their businesses, so it’s no surprise 25% less gas is now being sold to east coast customers while production has doubled over the past decade.
In recent years major Australian manufacturers have markedly downsized or closed. In 2022 Queensland’s Incitec Pivot, in response to increasing energy prices, closed its Gibson facility incurring the loss of 170 jobs and last year, also its Geelong fertiliser company, resulting in 40 lost jobs.
On-going consequences
Because of soaring gas prices Dyno Nobel has just sold Incitec Pivot for what ‘s been called “a fire sale price”, and Dyno Nobel CEO Mauro Neeves says he’s looking for opportunities in WA where gas is cheap and the state has a domestic gas reservation policy.
He says such a policy enables companies like his to support local industries.
Unaffordable energy costs forced Qenos, Australia’s only major plastics plant to close last year, as they did 169-year-old Oceania Glass, the nation’s only architectural firm.
It needed significant energy, particularly from gas, to power its 2000-tonne furnace in Victoria, and because the cost of east coast gas so savagely eroded profitability, shutting down the business was the company’s best commercial option.
Consequently, Australians will now have to buy most if not all the architectural glass and plastics they need, from China.
Kenvin Gallaher, GEO of SA’s largest company Santos, told an oil and gas conference in Brisbane at the end of last month that because power in Australia was so expensive and in some instances unreliable, he was now looking for opportunities in Papua New Guinea and the US --- places where investors could have confidence “projects are more likely to get finished” and power shortfalls expected in Australia are unlikely to occur.
Executives at Orica, the world’s largest manufacturer of mining explosives, chemicals and agricultural fertilisers, and at BlueScope Steel, say they’re considering reducing, or closing their Australian operations because of unacceptable rising energy costs.
Orica CEO Sanjeev Gandhi told the media he sees better opportunities in the US where energy is cheaper, and government policy is manufacturing friendly.
“If we can get enough gas supply at cost competitive prices, my next {investment} dollar comes into Australia -- so it’s all a matter of getting policy right.
“If you want to have a future made in Australia, manufacturing very clearly needs cost competitive energy and electricity prices, cost competitive natural gas, and enough availability of gas -- and obviously skilled labour.”
BlueScope CFO David Fallu declares there’s a pressing need to develop a gas policy that will support industry, and Manufacturing Australia CEO Ben Eade warns that continuing LNG imports are likely to “do more harm than good”.
Mr Eade says when planned LNG import terminals are built and there are “inevitable price hikes” for domestic users of gas, Australia never again will regain its former energy cost advantage.
“Australia doesn’t need imported gas. We should develop and reserve domestic gas for manufacturers and local customers rather than pursue solutions that entrench import parity pricing. What’s needed is political courage to ensure our abundant natural gas resources benefit the entire economy, not just exporters.”
Yes, but it’s complicated
Two thirds of Australians didn’t vote for the Albanese government in the May elections, and Macks Advisory suspects a high proportion of them would think it’s a good idea to keep enough of the country’s natural gas here for sale at a price that local companies can afford.
But the PM doesn’t need to worry too much about what most Australians may think about this, because irrespective of what they think he has enough capital, boosted with the support of a few non-Labor senators to get parliamentary approval for virtually anything he feels should be done when he’s ready.
Maybe Mr Albanese believes Treasury will be better off reaping tax from the profits of producers exporting as much of Australia’s gas as they want to, rather than having to rely for revenue from taxes paid by manufacturers able to survive essentially because of cheaper reserved gas.
If that’s so, he may well feel justified in declining to extend something like WA’s 15% gas reservation policy to the whole country.
We’ll indeed also be interested to see how long the government can get away unscathed pursuing a policy of procrastination on gas rather than developing a reservation policy (or at least a policy modification that ensures Australia retains a substantial and sustainable manufacturing sector).
Energy Users Association of Australia CEO Andrew Richards proclaims: “The reality is that if the east coast of Australia begins importing LNG, the domestic gas price will rocket from around the current price of $12GJ, to import parity prices of about $20GJ.
“Electricity prices will also soar given gas’s vital role as a marginal price setter in the wholesale electricity market, and there will be more manufacturers driven out of business by high energy costs.
The only survivors will be those making non-tradeable products like bricks or receiving government subsidies. Of course, the housing problem will also be worsened by rising costs of building materials.”
It’ll be interesting too, to see how long it takes newsletter readers (and anyone else) aware of this vital gas issue, yet voted Mr Albanese back into office, to wish they hadn’t.
