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SELECT COMMITTEE ON CLIMATE POLICY
23/04/2009
Emissions trading and reducing carbon pollution

CHAIR —I thank you for taking the time to appear before us today. We apologise that things are so tight for time. Again, I ask my colleagues for their assistance with respect to maintaining our schedule. Can you please make a short opening statement?

Mr Cauley —In terms of background, I will assume that people have seen our submission to the committee and I will just highlight a few key issues. The first point I would make is that Nyrstar does support the need to take action on climate change. It is important to us, the nation and the world. Nyrstar is the world’s largest zinc smelting company. In Australia we employ, directly and indirectly, over 3,000 people and contribute about $2 billion in export income.

In terms of our Australian operations, over 90 per cent of what we produce is sent to markets in Asia and we compete on cost competitiveness. That is the basis on which our profitability is based, with a very flat cost curve, which means that it is highly competitive.

The CPRS is being introduced during a worsening international financial crisis and a collapse in commodity markets. That has exposed companies like us to some serious challenges. As far as Nyrstar is concerned, we have been forced to reduce production in Europe and the US, with 50 per cent reduction in production in the US. We have completely closed a 260,000 tonne operation in Europe and we have also reduced production by about 30 per cent in another operation. At this point in time, that plant has been closed on a temporary basis on a six-month care and maintenance program, but we are under significant financial pressure.

In terms of the CPRS itself, you will see in the paper that I have used the $40 carbon price, but if we used a $25 carbon price the impact on us is about five per cent EBIT at Hobart, based on achieving a 90 per cent free permit position. For our Port Pirie smelter, because it is likely to be at the 60 per cent qualification basis, it is of the order of 19 to 20 per cent at a $25 carbon price which, in a very competitive business, is a significant impost on our operation.

I would like to move on to a couple of key points with respect to the white paper and the current scheme that I would like to highlight. The issue of market volatility and ability to pay is a key concern for businesses like ours where our returns are highly volatile and cyclical. Nowhere within the scheme is there any ability to take into account that ability to pay. In addition, the impact to the expanded MRET, in conjunction with the ETS, means that the impact on businesses like ours is significant.

Senator BOSWELL —What is significant? How much is that?

Mr Cauley —The impact of the MRET by 2020 on Hobart would be of the order of $8 million a year.

Senator BOSWELL —What is that in a tonne?

Mr Cauley —It is 260,000 tonnes.

CHAIR —We can do the calculation.

Mr Cauley —It is a significant impost. I have a few comments with respect to the scheme. We are pleased with the changes that have been made to the scheme between the green paper and the white paper with respect to some of the EITE considerations. In particular, we think that the lower threshold and the addition of the value-add metrics are significant steps forward in terms of the scheme design. There is still an issue with those organisations at 60 per cent, particularly in difficult times. We think that because of the issues with respect to the economy a more gradual adaptation to a carbon price is a much better option.

We think that the decay rate of 1.3 per cent is too aggressive and it needs to be linked to an international action on climate change. We firmly believe that the remainder of the world needs to be moving before there is a decay in the level of assistance. If equivalent climate policies are not introduced elsewhere we will see erosion in our cost competitiveness and that will then lead to carbon leakage.

I have already mentioned the ability to pay and, certainly in a cyclical business like ours, the ability to pay varies depending on what part of the cycle we are at. That is not accounted for in the current scheme design. We feel that it would be prudent right now, because of the economic crisis, to delay the start of the scheme until at least economic conditions and credit markets show signs of improvement. We think that there is a real reason why that should be the case.

A large proportion of EITEs, such as us, compete with firms in the developing world. As these countries are not considering the introduction of climate change policies, we see that there is a potential gradual loss in our competitiveness and investment as a result, so the design of those aspects of the scheme is very important.

I have already mentioned the MRET and the key issue there. The last point I would make is with respect to some of the overriding policy assumptions. We have concerns with respect to the modelling assuming that carbon capture and storage be commercialised by 2030 and also China introducing carbon cost mechanism by 2015 and India by 2020, with a global agreement by 2025. We think that is optimist and that there is real risk in Australia assuming that CCS is the answer to all the problems. We believe a portfolio of technologies and at least a consideration of a whole range of options is necessary, otherwise it is putting our eggs in one basket and there is a risk that long-term reduction targets will not be achieved.

That is a brief summary of the key points and I hope people have seen in the paper that there is a lot more of the detail that sits behind that.

CHAIR —Thank you.

Senator XENOPHON —I had the benefit of a briefing from Nyrstar in Port Pirie a few months ago. What is the difference in the energy intensity between the Tasmanian operations and the South Australian operations? Further to that, the argument of your Port Pirie colleagues is that if those plants are lost it would go offshore. On what basis do you justify that? Can you also tell us what your understanding is of the energy intensity of some of the overseas plants?

Mr Cauley —The two plants are actually very different. The operation here is a zinc electrolytic refining business. Whilst a portion of the Port Pirie site is a similar technology, a large component of the lead operation is different. It is a blast furnace based technology. It is different and almost impossible to compare.

We can say, in terms of the emissions intensity and energy efficiency, is that the Nyrstar plants are highly competitive in terms of energy efficiency across the world. I had a comment recently where someone suggested that Hobart is a very old plant and it is not efficient. That is actually not true. It is a professionally run plant and, in terms of energy efficiency, it is among the world’s best in terms of the use of energy to convert to zinc.

If we have a look at the Port Pirie plant, again it is an old plant, but the core technology, its inner plant blast furnace and the use of it, is efficient. We have seen in the last 15 years that a significant amount of production of lead and zinc in the world has moved from the western world to China. In fact, the world’s lead production over the last 20 years in China has gone from five per cent of the world production to 35 per cent. Similarly for zinc, over the last 15 years, I do not have the exact numbers at hand, but certainly China has of the order of a 15 per cent to 20 per cent increase in the proportion of the world. We do know that the technology being used in China is far less efficient than the technology here and there is a significant risk that, should these operations close here, they will be replaced with technology in Asia, and particularly China, that is nowhere near as efficient. That is the risk and that, for us, is the carbon leakage issue.

You might see in my paper that I have shown a comparison of the cost per tonne of production of zinc across the world. You will see that the production of zinc in China is the cheapest of anywhere in the world. That is because the labour costs are low, but their energy efficiency is actually poor. Hence, the risk because of the cost competitiveness and the competitiveness of this industry is that small changes and impacts on us—and what I am talking about here in terms of EBIT are more than small—have the potential to threaten businesses in this country, close them and then they spring up elsewhere.

Senator XENOPHON —Thank you.

Senator CAMERON —Do you have a plant in China at Yunnan?

Mr Cauley —We have a joint venture.

Senator CAMERON —Yes, it is 50 per cent. I had a look at your website and you have got a code of business conduct. Part of that is to prevent harm and to ensure that you look after the environment. I assume you do that in China as well.

Mr Cauley —Absolutely. In fact, those values are very serious to us. In terms of Nyrstar, that was part of the construction of the company. We recognise that some of the standards there are not what they should be, but we have been working hard to do something about it. As a matter of fact, we are actually exiting that.

Senator IAN MACDONALD —What are you exiting?

Mr Cauley —The Chinese joint venture at Yunnan. We are in the process of exiting that, and we have announced that.

Senator CAMERON —You have other operations in China.

Mr Cauley —We have two other joint ventures.

Senator CAMERON —You may have to take this on notice and go back to your parent company. Some of the impression that you have given is that if you operate in Australia you will be subject to all these restrictions. My advice is that there is a national climate change program in China that was adopted in June 2007. This program has a commitment to reduce national energy intensity by 20 per cent by 2010; the adoption of a national renewable energy standard of 15 per cent by 2020; a top 1,000 enterprises program, of which the largest 1,000 enterprises will agree on an energy efficiency improvement plan and have its energy consumption monitored; a program to eliminate inefficient power plants totalling eight per cent of domestic capacity by 2010; plans for the closure of inefficient industrial plants, including 100 million tonnes of pig iron capacity and 55 million tonnes of steel making capacity; and the imposition of export taxes on energy intensive industries which include a 10 per cent tax on primary steel products. Do you agree that all of these initiatives will put a cost on Chinese manufacturers?

Mr Cauley —Yes. I am not familiar with that, but I would agree.

Senator CAMERON —Around the world countries are taking steps to impose costs on business in an effort to reduce CO2. Is that not the case?

Mr Cauley —There is certainly a measure of that going on, absolutely. I do not think that is the argument. The argument is that for a scheme to be effective, it relies on that international action. The risk that we run is if we move too rapidly and too quickly before the international action then we threaten the viability of businesses here before that international action is taken.

Senator CAMERON —How does that fit with your business code of conduct that says that you will look after the environment when you are arguing here that it is about money and costs? Surely the business code of conduct that you have got says that you must look at the environment; you cannot just dismiss it.

Mr Cauley —If you have a look at Nyrstar and the way that we do business, you will find that the environment is an absolutely critical part of the way that we do business. I will give you two examples of that. The 10 by 10 program in Port Pirie, which is a major health and environmental program, which I initiated myself as general manager there, is a great example of a joint initiative looking to improve environmental performance, recognising our problems and doing something about them.

Senator CAMERON —That is good.

Mr Cauley —I agree with you that we also need to be taking action with respect to carbon and carbon emissions. I am very serious, as an organisation, that we will do that as well. We are part of EEO. We take our obligations seriously. We will continue to work to be as efficient as we can and improve our energy efficiency and emissions intensity.

CHAIR —Senator Milne.

Senator CAMERON —You need to keep that standard for everybody, Chair, because you have not been doing it today.

Senator ABETZ —He has been very good to all of us.

CHAIR —Senator Cameron.

Senator CAMERON —I have some questions on notice.

CHAIR —Thank you.

Senator MILNE —You have advocated a delay until 2012 for the scheme coming into effect. Have you done a cost of what the accelerated rate of reduction of emissions would need to be between now and 2020 with that two-year delay?

Mr Cauley —From our perspective?

Senator MILNE —Yes.

Mr Cauley —No.

Senator MILNE —The question of clarification that I would like for this committee is in relation to the CO2 intensity of electricity generation and this issue of factor 1. This is something that Tasmanians, in particular, are interested in. Tasmania has, for a long time, relied on hydroelectricity as opposed to coal fired generation, we lost that competitive advantage when Basslink went in and we imported coal-fired power to Tasmania. Nevertheless, I understand that your contract is predominantly hydro based. Is that correct?

Mr Cauley —That is true.

Senator MILNE —Can you explain to me if there is any recognition under the CPRS for regional advantage for hydro generation? For example, can Tasmania not benefit from renewable electricity in the context of a competitive advantage? I am just interested in how this factor 1 applies and how it is averaged or how it works.

Mr Cauley —The key issue with respect to energy is the national electricity market. Your comment about Basslink is absolutely right. If we look at the Treasury modelling, the proposed or projected increase in power costs in Tasmania is almost the same as the projected increase in power cost elsewhere in Australia, despite the fact that it is hydro generated. I would have been surprised if, in fact, that was not the case. That has been fundamental to our argument all along in that there should be advantage in Tasmania because of the fact that there is hydro generation of a significant part of the power. The reality is that it is a national electricity market; we will pay the price that the national electricity market demands, and that means that the cost of carbon will actually come through to energy in Tasmania, despite the fact that there is a very small amount of carbon associated with most of that energy. I guess that is one of the features of the scheme and it is why we have been arguing about the need to compensate for indirect carbon impact, if you like, with respect to energy. It is a major issue. We have seen this in Europe. We have seen elsewhere where exactly the same thing happens. I am not sure if that answers your question.

Senator MILNE —That is all right. I just wanted to get on the record the explanation for Tasmanians, in particular, regarding how that works. I would like to go to a final question in relation to what the science demands and what the government’s target is. The British government, overnight, has committed to a 34 per cent reduction in greenhouse gas emissions on 1990 levels by 2020. The Australian scheme is five to 15 per cent. You are saying that you want to delay for two years. Do you support a scheme of five to 15 per cent, or do you think it should be more ambitious?

Mr Cauley —You are probably asking me a question which our CEO should answer. He is not here. He is sitting in an office in London. I think that is a question that I am ill equipped to answer.

Senator MILNE —The company must have a view of whether you support the Australian scheme.

Mr Cauley —At the start of my remarks I made the comment that we support action on climate change, and we do.

Senator MILNE —Everybody supports action on climate change, but when you come down to the detail it is a question of how quickly, how deep the cuts and who should make the relative contribution. I was really asking for the company’s view about the Australian government’s five to 15 per cent target, and you are saying that you are not empowered to comment.

Mr Cauley —I am saying that, but what I would also say is that we are looking for international action. The reality of our industry is that unless there is international action our competitiveness is going to be rapidly eroded and it will be irrelevant, because that will threaten our industry.

I have one last point that I would like to make. One of the things that is forgotten a lot is that the zinc that we product actually extends the life of steel by 10 to 12 times. Galvanising is a fantastic part of reduction of CO2 emissions in the world. I know it is something we should have done more of, but we should be crying from the rooftops about how important zinc is to reducing carbon emissions.

Senator ABETZ —Undoubtedly because of time constraints, Senator Cameron did not go on to tell you that the way that China was going to deal with the issue of climate change and energy sources was to develop a lot more nuclear power. It is the same with Senator Milne.

Senator CAMERON —Have we got a nuclear plant over here?

Senator ABETZ —It is amazing that Senator Cameron is allowed to interject at will, but when somebody interjects on him he becomes high and mighty and it is a moral outrage.

CHAIR —We need to get on with the questioning.

Senator ABETZ —Are you aware that in the United Kingdom as well—and, I am sure only because of time constraints, Senator Milne was unable to tell us this—their tackling of climate change and reducing their carbon footprint will also be via nuclear energy? In relation to energy, how many years ago did the zinc works in Hobart come here courtesy of a specifically built hydro scheme?

Dr Terwinghe —Ninety years ago.

Senator ABETZ —In relation to your production, how much of it is exported?

Mr Cauley —Ninety per cent, or of that order.

Senator ABETZ —What percentage of the world market does Nyrstar represent in relation to zinc and the other products?

Mr Cauley —Nyrstar is 1.2 million tonne, so about 10 per cent.

Senator ABETZ —You are very much alive and subject to international competition and your product is very much trade exposed because you sell 90 per cent of it into the international market, and in the international market you are only a 10 per cent player. There is another 90 per cent represented by other companies who, if they could, would like to take advantage in relation to any price increases that you might have to incur. Is that right?

Mr Cauley —Absolutely.

Senator ABETZ —In relation to your production of metallurgic products, or zinc—that is how we refer to it here in Tasmania being the zinc works—is the energy efficiency relatively high by world standards?

Mr Cauley —Yes.

Senator ABETZ —If you were to suffer a price disadvantage, not only by the 90 per cent—and I assume you would be in that 90 per cent category? We are hopeful, anyway.

Mr Cauley —Yes.

Senator ABETZ —The renewable energy target as well, but then on top of that the 1.3 per cent decay per annum would put severe stress on your financial viability in Australia?

Mr Cauley —Over time that is true.

Senator ABETZ —Of course, we need zinc products for the reasons that you have outlined. If we did not make it in Australia, we would be getting it from overseas sources.

Mr Cauley —Absolutely.

Senator ABETZ —Are those overseas sources likely to have the same environmental constraints that exist in Australia today, let alone the constraints that might apply after the renewable energy target and the CPRS are implemented?

Mr Cauley —That was the question that we were talking about earlier. I can give some statistics with respect to this. The average today is 6.8 tonnes of CO2 per tonne of zinc in China. The average in Australia is 2.6 tonnes of CO2 per tonne of zinc. It is significantly because of the fact that it is hydro power as part of the energy source for producing zinc here. It is significant. The carbon leakage issue is a real issue. I take on board what Senator Cameron said, that there is action being taken today. I can tell you that the difference is massive.

CHAIR —I thank you for your appearance and evidence here today. It has certainly been valuable and we understand the importance of business to this city, in particular.

[2.50 pm]