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Economics References Committee
01/04/2016
Future of Australia's steel industry

TIDD, Mr Gerry, Executive Vice President, Corporate Affairs, BlueScope

VASSELLA, Mr Mark, Chief Executive, BlueScope Australia and New Zealand, BlueScope

Committee met at 12:34 pm

ACTING CHAIR ( Senator Edwards ): I declare open this public hearing of the Senate Economics References Committee. The committee is hearing evidence on the committee's inquiry into the future of Australia's steel industry. The Senate referred this inquiry to the committee on 26 November 2015 for report by 30 June 2016. I welcome you all here today. The committee has received 33 submissions so far, which are available on the committee website. This is a public hearing and a Hansard transcript of the proceedings is being made. Before the committee starts taking evidence, I remind all witnesses that, in giving evidence to the committee, they are protec ted by parliamentary privilege. It is unlawful for anyone to threaten or disadvantage a witness on account of evidence given to a committee, and such action may be treated by the Senate as a contempt. It is also a contempt to give false or misleading evidence to a committee. The committee prefers all evidence to be given in public but, under the Senate resolutions, witnesses have the right to request to be heard in private session. It is important that witnesses give the committee notice if they intend to give evidence in camera. If a witness objects to answering a question the witness should state the ground upon which the objection is taken and the committee will determine whether it will insist on an answer, having regard to the ground on which it is claimed. If the committee determines to insist on an answer, a witness may request that the answer be given in camera. Such a request may, or course, also be made at any other time.

I remind people in the hearing room to ensure that their mobile phones are either turned off or switched to silent. The committee has agreed to a motion relating to filming and photography, and the committee does agree to the media being present and authorises the media outlets present at the public hearing to record the proceedings, subject to the following conditions: the committee or a witness can object to being recorded at any time, and the committee can require that recording cease at any time; recording must not occur from behind the committee or between the committee and the witnesses, and must not otherwise interfere with the proceedings; computer screens and documents belonging to senators must not be recorded; flashes must not be used; and the chair of the committee will make a statement outlining any of these conditions if they are breached along the way.

Just before I wrap up completely, I will bring to your attention that, on the basis of advice provided to the Governor-General by the Prime Minister and the Attorney-General, which has been published, under section 5 of the Constitution, Parliament will be prorogued from 5.00 pm on Friday 15 April until 9.30 am on Monday 18 April, when Parliament will be summoned to sit for a new session. The President received a copy of the proclamation on 29 March. The prorogation is regarded as terminating the sittings of the Senate. The Senate committees, but not most joint committees, are authorised by the Senate to continue to meet and transact business after prorogation. Noting that, as the prorogation is over a weekend, committees are unlikely to be affected but may meet, conduct hearings and make reports if they choose to do so. Reports which are due by a particular date under an order of the Senate should be presented to the President by the due day. The prorogation is regarded as superseding the Senate's order for the days of meeting and estimates hearings for the remainder of 2016, but the Senate may decide subsequently to reschedule or replace those hearings. In short, ladies and gentlemen, we are okay to be here. I hope that that clarifies anything for all of you out there.

Finally, on behalf of the committee I would like to thank all those who have made submissions and sent representatives here today for their cooperation in the inquiry. I now welcome Mr Mark Vassella and Mr Gerry Tidd from BlueScope Steel. You have lodged submission No. 4 with the committee. Would you like to make any amendments or additions to this submission?

Mr Vassella : No.

ACTING CHAIR: Thank you for appearing before the committee today. I invite you to make a brief opening statement, should you wish to do so. The committee will then ask questions.

Mr Vassella : Thank you, Chairman and senators. Welcome to the Illawarra. I trust you had an interesting visit this morning to our site in the Sustainable Buildings Research Centre. I have a few brief comments, and then we would be very happy to answer any questions you may have.

BlueScope is a major employer and exporter, manufacturing in all of the mainland states of Australia. We employ 7,500 people, and in the Illawarra we have about 3,000 employees and 1,000 full-time on-site contractors. Our annual steel production capacity is 2.6 million tonnes. About two-thirds of that is sold locally and the other third is exported to many countries around the world.

The domestic steel supply chain employs some 90,000 people, according to the Australian Steel Institute. Our focus at BlueScope is mainly on the higher value branded products for building and construction. Products we make in Australia include coil and plate galvanised steels, and coated and painted products; and our brands include Colorbond, Zincalume and Lysaght. Steel coil and plates are sold to local manufacturers, and our coated and painted products are typically sold to the building and construction sector, often being further processed. Our Lysaght and other business brands roll form and supply building products such as roofing, walling, cladding, framing, rainwater goods et cetera.

Our customers benefit from BlueScope being a domestic steel supplier, in terms of quality steel products manufactured to Australian and international standards and backed by trusted testing and certification regimes and via products developed and tailored for local environmental conditions, including Colorbond steel with Thermatech, the roof solar reflectance products we saw this morning at the research centre. We also customise products to meet individual customer needs. We have market-leading warranties based on our local product testing—in fact the Colorbond roof comes with a 36-year warranty. And we have technical and after-sales support on the ground that deals with any issues our customers may have.

The current trading environment for BlueScope has been probably the toughest in living memory. Apart from the GFC effects, the steel industry worldwide is plagued by overcapacity which has depressed prices and margins. Notwithstanding that, in our last half-year results we achieved the best results we have since financial year 2010. That is the result of six long years of very hard work by all of the constituents and stakeholders in BlueScope. We have some way to go before the steelworks is a viable business, and as a result we have had to target substantial cost savings to ensure that we are cost competitive, as we believe this is the only way we can continue to make steel and continue to invest in our assets, people and products.

You might have seen overnight some terrible news out of the United Kingdom where Tata Steel are talking about effectively closing their part of the steel industry in the UK, which is devastating news for that country.

Innovation is a key strategy of ours and the basis of our success in our coated and steel products, which you witnessed today. We are a small producer of commodity steel by global standards but we are, unusually, a large manufacturer in terms of value-added painted and coated steel products. We run an innovation and product development facility here at Port Kembla, with 70 people employed and some 30 PhD qualified scientists. We continue to invest in our products, such as Colorbond—most recently with the next generation of Colorbond in partnership with Nippon Steel, our joint venture partner from Japan. We also invest in the steel innovation hub at the University of Wollongong.

BlueScope believes there are three main ways that federal and state governments via bipartisan policies can help the steel industry: firstly, to help grow the markets, including by policies that promote trade and encourage the use of Australian steel on Australian standards in government infrastructure projects; secondly, by reducing government imposed costs, such as unnecessary regulation; and, thirdly, by providing swift remedies to counter unfair imports and enforce product standards.

We would like to touch briefly on a few current policy issues that are important to us, which were detailed in our submission. But, before outlining those, we would also like to raise a new issue which is of great concern: the proposed introduction of the effects test into competition law. The government's proposed amendment to section 46 of the Australian Competition and Consumer Act to introduce an effects test could have a very serious effect on BlueScope's competitiveness.

Under the current law, as you would be aware, it must be demonstrated that a firm took advantage of its market power for the deliberate purpose of substantially lessening competition. Under the proposed change, the conduct that has effect of lessening competition, even if it was not the intent and even if it was not done by taking advantage of market power, could lead to prosecution. We see this as quite a serious change from our perspective. For example, a change to improve your product or reduce your prices will naturally have an effect on your competition, and may lead to prosecution.

In the steel industry our real competitors are foreign steel manufacturers that export steel to Australia and producers of competing products, such as brick, tile and aluminium. Our end customers are the hundreds of thousands of Australians who build or renovate homes or commercial buildings, and we believe the ACCC misunderstands our markets. This narrow view of our markets has already obstructed recent merger clearances that were critical for BlueScope's competitiveness. Arming the ACCC with an effects test and more powers would advantage imports over Australian steel, harm our competitiveness and work against the interests of our customers.

I want to speak briefly on some of the other policy issues we detailed in the written submission. In relation to antidumping, we support free and fair trade and we recognise the benefits of free trade agreements. An effective antidumping system is a key element of the rules based international trade order, and we are pleased that both major parties, senators and minor parties have supported that. We still believe, however, there are further changes that are needed to ensure it is fully effective in redressing injury from dumping, including more effective dumping duties, speeding up antidumping and anticircumvention investigations and greater transparency in the process of determining like goods, which we believe many importers play games with allowing them to circumvent antidumping actions.

One reform we think would greatly improve protection against surges of dumped imports where there are global gluts—as we are seeing at the moment—would be to make it faster and simpler for the government to apply safeguard measures. The current process is onerous, requiring the Productivity Commission to extensively investigate. A faster investigative process carried out by, for example, the Anti-Dumping Commission or the industry department could provide more effective relief.

In terms of product standards in infrastructure we believe the federal and state governments should ensure that steel used in government funding infrastructure projects complies with Australian standards and does not threaten public safety. There have been some recent high-profile examples of substandard products failing in construction.

In terms of climate change we support the measures to reduce greenhouse gas emissions on a global basis in line with the United Nations framework convention, but policy to achieve Australia's emissions targets cannot be a one size fits all and needs to take into account our national circumstances, the differing technical and financial capabilities of each sector and the sources of each sector's trade competition. Most of our competitors do not face mandatory carbon costs. Levying a carbon price on the domestic steel industry without effective shielding or equivalent tax on imports would harm our competitiveness.

Other policy issues include local content and competitive neutrality. Major employers such as BlueScope are at a competitive disadvantage with overseas competitors, due to inefficient state taxes, such as payroll tax, and high costs that reduce our competitiveness. This added cost puts us at a competitive disadvantage, especially when we are bidding for government funded infrastructure projects. We would like to see competitive neutrality with foreign suppliers so that when governments are making decisions on local content our higher cost base is taken into account.

Access to affordable energy and price—maintaining our competitive advantage of diverse and affordable energy resources is critical to manufacturing, including steelmaking. Australia's east coast gas market, as you are aware, is undergoing a profound structural change, mainly from the rapid development of the liquefied natural gas export industry, which has seen a trebling in demand for gas from the east coast. The impact on downstream domestic customers and gas users, both industrial and residential, is substantial and we believe warrants continuing attention from policymakers.

In conclusion, we will continue to work with all parties to ensure public policy promotes rather than harms the competitiveness of the Australian steel industry. Mr Chairman and members of the committee, Gerry and I would be happy to answer any questions you might have.

ACTING CHAIR: Thank you very much. I will go back to one thing in your statement: you mentioned steel that does not comply with Australian standards and you went on to say that they are in fact dangerous. Is there steel imported into Australia that does not meet Australian standards, and is indeed dangerous and could endanger life?

Mr Vassella : What I would say to you is that there is steel that is imported into Australia under a whole range of standards—Japanese, American and often very unusual standards.

ACTING CHAIR: That was in your statement.

Mr Vassella : That product can be used in structural applications. We believe ensuring that steel products that are used in structural applications should meet Australian standards and Australian quality tests. That does not always occur.

ACTING CHAIR: So how does that come to be?

Mr Vassella : I think of the example we saw in Melbourne recently. It was not a structural application, but the aluminium facade on the apartment building caught fire. That was a product that did not meet Australian standards, but was used in construction.

ACTING CHAIR: So your contention is that everything that comes in here meets an Australian standard for an application, but when it gets here dodgy people put it into a building it is not rated for. It is rated for a different standard. That is what happens.

Mr Vassella : That is eminently possible. Absolutely.

ACTING CHAIR: That is a completely different set of questions, though, isn't it? How do we get people to comply with the standards of steel which are supposed to be meant for one application or another? That is not really a matter for the Australian steel industry. The Australian steel industry produces steel, and so does America and China and all of these other places. How people apply it once they have bought it is a matter for building codes and councils and things like that.

Mr Vassella : Correct. Our contention would be that we meet the costs of ensuring our product complies with Australian standards. Other companies and importers which are our major competitors do not.

ACTING CHAIR: I get that. The way that it was framed, though, was that steel that comes in to Australia does not meet Australian standards. That is not the case.

Mr Vassella : That is in fact the case. Steel can come into the country meeting a different standard and not an Australian standard. It can meet a JSA Japanese standard or it can meet a US standard.

ACTING CHAIR: But what Australian standard does it meet?

Mr Vassella : It does not necessarily meet any Australian standard; it complies to an external standard.

ACTING CHAIR: So what is it used for if you cannot use it for anything in Australia?

Mr Vassella : It is still used for the application it is brought in for.

ACTING CHAIR: So how does it get here and how are we able to sell it?

Mr Vassella : It is imported via the import channel and sold via the distribution network. We have products coming in all the time that—

ACTING CHAIR: So where does it get sold? Who sells it? Bunnings?

Mr Vassella : It is sold into construction products, infrastructure projects—it is sold right across the network.

ACTING CHAIR: And do they put on it, 'This steel does not meet any Australian standard'?

Mr Vassella : No, they do not put that on it. That would defeat the purpose.

ACTING CHAIR: Who buys this? Who buys this steel that does not meet any Australian standards?

Mr Vassella : Consumers, builders, steel and concrete users.

Senator LAMBIE: I guess they would be able to bring that steel in. If you are having another builder from a different country come in and they bringing their own product and workers in, then they have right of way, really, haven't they? There is nothing to stop them.

ACTING CHAIR: That is not what I am looking to prosecute here. My issue is: are Standards Australia charged with certifying every consignment of steel that comes across our wharves?

Mr Vassella : No, not necessarily to Australian standards. Steel is coming in to various standards. I do not think anybody would have the resources right now to check every piece of steel that comes across the wharf to ensure it meets an Australian standard.

ACTING CHAIR: Does every bit of your steel that you make meet Australian standards?

Mr Vassella : It meets Australian standards. That is correct.

ACTING CHAIR: For the application?

Mr Vassella : That is correct.

ACTING CHAIR: And does the steel that comes in just not get certified for the application as yours does?

Mr Vassella : There is no recertification process. If a product comes in to a Japanese standard, for example, it is not required to be recertified to an Australian standard. We make our products to an Australian standard and that product was made to a different standard.

ACTING CHAIR: What is Standards Australia doing in that workplace?

Mr Vassella : They are setting standards for Australian manufacturers like ourselves.

Senator KIM CARR: I can help you here. The Australian standard may well be set, but it is a private company that does the standards; it is not a government company. They do not certify its use; they only certify the standard at which it is produced.

Mr Vassella : That is correct.

Senator KIM CARR: You may wish to take this on notice, but can you give the committee any example where there has been in a government-funded contract the use of imported steel that does not meet Australian standards.

Mr Vassella : I do not have that detail with me, but we could certainly take that on notice and get some information.

Senator KIM CARR: Your research department?

Mr Vassella : Absolutely.

ACTING CHAIR: It is important that we do not conflate these issues, because in your presentation there is a suggestion of the importing of steel that did not meet any standard then conflated with government projects that should include Australian steel. Is the suggestion that there is steel that does not meet Australian standards, as Senator Carr just said, in government projects?

Mr Vassella : We would be happy to take that away and get whatever information we can.

ACTING CHAIR: Because I think it should be clear for everybody that that is not your contention.

Mr Vassella : Our contention is that all of the products we make meet Australian standards and the cost base that we incur to ensure that they meet those standards is not necessarily applied to our competitors.

Senator KIM CARR: The truth of the matter is that on very large resource projects, for instance, where there are international consortia building a project, they bring with them their own suppliers producing product often to international standards not to Australian standards?

Mr Vassella : That is correct.

Senator KIM CARR: Japanese standards, for instance, for pipes and various other bits and pieces—

ACTING CHAIR: Can you name them?

Senator KIM CARR: This is common practice. That is why we established work under the tariff concession orders to actually try to get these issues lifted.

Senator LAMBIE: Should there be a certification process for imported steel?

Mr Vassella : I know that the Australian Steel Institute have in their submission quite a detailed component around ensuring that a product meets Australian standards, that is correct.

Senator KIM CARR: The South Australian government has introduced measures for the use of Australian standards in government funded projects. Do you have any understanding of how that is working?

Mr Vassella : No, I do not, actually.

Mr Tidd : I think it is still early days in that program.

Senator XENOPHON: But there is no similar standard here in New South Wales?

Mr Tidd : There is not, no. The South Australian program was the first cab off the rank.

ACTING CHAIR: We have a place called Whyalla and a company called Arrium, which you would know very well, which is obviously very interested in maintaining some level playing fields. You did bring up the Tata Steel UK exit, which threatens 15,000 jobs, which has been reported overnight and recorded in today's media. Is this groundhog day? I read all I can about this issue, and that is a mirror image of what is going on here in Australia, isn't it? I quote:

Although comparatively higher wages and energy costs have contributed to the financial woes of the Tata plants, the biggest problem for Port Talbot and British steel production is the importation of cheap Chinese steel.

Mr Vassella : That is absolutely the scenario that we have been battling against in Australia. We make 2.6 million tonnes down the road here at Port Kembla. China exported 100 million tonnes last year. So 2.6 million tonnes against 100 million tonnes. The rest of the steel industry is suffering from the same pressures that we suffered from. Five years ago, we took some very hard decisions in terms of closing capacity here in Port Kembla and attacking our cost base to try and remain cost competitive in the face of that competition. But without an effective antidumping regime, that steel finds its way to the path of least resistance.

ACTING CHAIR: Are you asserting that we do not have an efficient antidumping regime here?

Mr Vassella : We have an antidumping regime that has improved dramatically, and all parts of government, all parties and independent senators are to be thanked for that. We still believe there is opportunity for the process to be improved. We have seen in the last week the United States' antidumping group put tariffs of 250 per cent on Chinese steel.

Senator KIM CARR: They took some action against your company as well?

Mr Vassella : Yes, they did. We actually have a company on the west coast of the US that we own. It is called Steelscape. And we send our product from Port Kembla on a ship to that company in the Pacific Northwest, and they transform it into a higher value product to sell domestically. Because of our imports of hot rolled coil—largely into our owned company—we fell under that regime, but our duty was levied at 25 per cent. The duty against China was 250 per cent.

Senator KIM CARR: Did you have any appeal mechanism against the action taken against BlueScope?

Mr Vassella : I guess one of the things that we look at in terms of antidumping regimes is the American system tends to be much more aggressive than ours, and they take a much harsher stance in terms of time frames, penalties and retrospective penalties. So, no, at this stage we do not have a mechanism to appeal.

Senator KIM CARR: Do you think the Australian system should be more like the US?

Mr Vassella : I think as we have detailed in our submission, faster action around announcements of PADs, different duty measurement requirements—I think there are opportunities for us to continue to improve the anti-dumping regime. And we need to, or the imported steel will find its way to Australia—which would be very threatening for our industry.

Senator XENOPHON: Acting Chair, can I follow up that specific issue?

ACTING CHAIR: Certainly.

Senator XENOPHON: Obviously, it is an issue that I have a particular interest and a longstanding interest in. In broad terms, how would you compare our anti-dumping regime to that of, say, the United States?

Mr Vassella : I would say that we take a much more pure economic perspective.

Senator XENOPHON: I think we have been referred to as the 'free trade Taliban' by some countries! We take the purist view of free trade.

Mr Vassella : We take a very pure approach. In my sense—I have lived and worked in America for three years with BlueScope—the American system is very much local manufacturing biased.

Senator XENOPHON: And we do not have that here, do we?

Mr Vassella : We still think there is further room for improvement in the systems in Australia—that is correct.

Senator XENOPHON: You have referred to it in your submission; on notice, can you provide some specific changes, mechanisms that you think ought to be changed, in terms of the nitty-gritty—

Mr Vassella : Sure.

Senator XENOPHON: because that is an issue that we can put to the Anti-Dumping Commission and, of course, to government in respect of that. I have some questions on procurement.

ACTING CHAIR: I am happy to give everybody a shot at this. Senator Lambie did ask me for a shot earlier. So we will start and then go round.

Senator LAMBIE: Who is your biggest international competition that sells into the Australian market—that you are aware of?

Mr Vassella : The Australian market really is an open market in terms of steel. We have very minor, if at all, tariffs on any steel products. So it is pretty much a free market. The large importers come from Korea, Taiwan and, of course, China, with the massive amount of steel that they export. But, really, it is not just restricted to Asian countries. We see imports from Turkey. We are currently seeing imports from Belgium of all places. So companies with last tonnes, incremental tonnes, will sell their product wherever they can—often—just get cash for it.

Senator LAMBIE: By allowing this to happen, this is a threat to the profitability of your business and, of course, the security of jobs for workers.

Mr Vassella : Correct. It is a threat to the survival of steel-making, which is, really, the challenge that we have been facing with our employees, with the unions, with government over the last couple of years as we have tried to ensure that the steel-making business remains viable.

Senator LAMBIE: Are you aware of any anti-dumping penalties that have been applied to the Chinese or where other steel is coming from?

Mr Vassella : We have a very active interaction with the Anti-Dumping Commission. Dale Seymour, the commissioner, has been working very collaboratively with us. They are expensive, costly and time-consuming proposals to go through, but I think, currently, there are something like 42 applications—I will stand corrected on that; but there are quite a large number of applications—that have put into the Anti-Dumping Commission from the steel industry broadly. Anti-dumping margins have been levied against China and against many countries on a range of products.

Senator LAMBIE: I just want to ask you about your operating costs when it comes to—are you electricity or gas, or both?

Mr Vassella : We use both. We have a lot of indigenous gas that is produced out of the coke ovens and the blast furnace that we use on the plant. But we also use natural gas, and we are a large consumer of electricity. So we use all of the utilities—yes.

Senator LAMBIE: And with those charges—the gas and electricity charges—do you have any agreements with the state governments so that you can get reduced costs from those?

Mr Vassella : No. We buy our utilities at market prices. As we mentioned, one of the concerns for us around natural gas has been the structural change with the export businesses that have been built in Queensland and the impact that will have on our costs and the costs of other manufactures and consumers.

Senator LAMBIE: I understand that, because smart countries have a gas reserve policy; mate, not here in Australia. I am asking that because I can tell you now in Tasmania some of our big electricity users have had to get reductions on their electricity from the state government. There are no qualms in that—no problem whatsoever. The electricity and the gas that you are using, they are not Australian-owned any longer, are they? That is coming from overseas countries. Don't they own the electricity in New South Wales now—is that correct? So there is no negotiation power out there? Is there any room for you people to negotiate on your buying price for energy?

Mr Vassella : We are a large user of utilities. We leverage whatever buying power we have, but we get no government assistance in terms of our utility cost. It is whatever negotiation we can have with the providers of those utilities.

Senator RHIANNON: Some people have suggested that there should be a requirement for 90 per cent—or even higher; some have said 100 per cent—local steel content to be mandated in public works projects. Is that something that you support?

Mr Vassella : We absolutely support the use of domestic steel—that is vitally important for us. Our view is that it is difficult to have mandated percentages, particularly in relation to the WTO requirements. Any policies that reflect competitive neutrality and take into account the value of domestic manufacturing—those domestic tonnes are vitally important to our business, but we have not gone as far as suggesting mandated percentages, because of the challenges we think that brings governments.

Senator RHIANNON: Many other countries have it mandated, I understand, and they are also subject to the WTO. Is it that you have different advice or is it just a general impression?

Mr Vassella : There are other countries that have different perspectives. For example, there are 'made in America' requirements—steel that needs to be melted and poured in America—for some defence contracts. Perhaps it goes back to some of the earlier questions about how the rules are interpreted in different countries. In my opinion, we tend to take a fairly pure approach to antidumping.

Senator RHIANNON: I am sticking with that, because it would seem that it would just make such a difference. It would give security for the steel industry in Australia.

Mr Vassella : Domestic tonnes are incredibly valuable to us. When we export steel, it is at a much lower rate. From our perspective, whatever share we can get of domestic steel usage is incredibly valuable to the viability of our business.

Senator RHIANNON: I want to explore this issue of you adding your voice to it. Is it purely because of an impression, an understanding, about the WTO and what they do? The fact that other countries mandate it, to my mind, seems to weaken your case.

Mr Vassella : Perhaps it does. From our perspective, though, we think that those sorts of mandated levels come with challenges.

Senator RHIANNON: What sort of challenges?

Mr Vassella : WTO requirements or compliance challenges. From our perspective, that is why we have not pursued that area. Having said that, we aggressively pursue with governments that, for example, competitive neutrality should be taken into account when procurement decisions are made. The value of local production and the contribution we make should be included as part of the purchase decision, rather than just a flat 'dollar per tonne' that might be $10 a tonne cheaper for an imported product, for example.

Senator RHIANNON: Is that something that you are in discussions, or have been in discussions, with state or federal governments about?

Mr Vassella : We talk to state and federal governments constantly, as well as to private companies that, as Senator Carr mentioned, bring in large constructions from overseas. We talk to them about the value of local steel—and not just the product, but the total value package we provide.

Senator RHIANNON: With regard to your own produce, I understand that your Colorbond and your customised produce is the most profitable part of the business. Is that correct?

Mr Vassella : We have a range of products, from our commodity based products, like hot rolled coil and plate, which are much lower margin products, to our value-added products, where we have built fabulous brand equity—products like Colorbond. So, yes, they are higher value products for us, that is correct.

Senator RHIANNON: Are you in talks that you would consider closing down the blast furnace and just putting all your business into Colorbond and these more profitable end products?

Mr Vassella : That is a very interesting question. We went through that process in great detail last year. We think there is a very important link between our steel-making and our high value-added products. It allows us to control the quality, the consistency and the supply chain of those products. It allows us to continue to develop them. We actually see our steel-making business as a total business. We sell some products that are lower margin or lower value and some products that are higher value and higher margin, but the steel-making component of it is a very important part of our Colorbond offer.

Senator RHIANNON: Are you ruling out that there are talks going on to close down the blast furnace or to explore that possibility?

Mr Vassella : I am sure you are aware—last year was quite public—that we went through a process of justifying the survival of the steelworks. The cost-saving initiatives that we put in place are working effectively. We are still not back to a point where the steel-making business is generating positive cash—that is a challenge for a company—but we are working very hard to try and get it to that stage.

Senator RHIANNON: I was not talking about last year. I appreciate what happened last year, but is it on the table now? I am asking the question right now.

Mr Vassella : Unfortunately I do not think that will ever be taken off the table. If, for example, the Australian domestic market was to reduce significantly because of imports—unfortunately that scenario can never be taken off the table.

Senator RHIANNON: Even though you have all that support from the government?

Mr Vassella : The support that we got from the government was a payroll tax holiday for a three-year period. That is money that needs to be paid back, so really what we got from the New South Wales government was support in deferring the expense for payroll tax, which we are required to pay back. It was a cash flow piece of assistance. It was very valuable to us at the time, but really it is money that we need to pay back. It is not assistance per se; it is more a delay in the cash flow.

Senator LAMBIE: So you have to repay that?

Mr Vassella : Yes, we are repaying that.

Senator LAMBIE: Do you have to pay that back with interest as well?

Mr Vassella : No, there is no interest on that repayment, but we are absolutely required to pay the payroll tax back, so it is not assistance per se.

Senator RHIANNON: Can we just go back to this issue about the standards. I must admit that when I saw that tragedy in India, with the big collapse and the tangles of steel and concrete, the issue of standards did cross my mind, because I was thinking about today's hearing. Coming back to Australia, it is extraordinary to hear that these products are coming into our country without the standards that you are obliged to have. Is that something that you are in talks with the government about? Surely there is a financial problem there for you, where you are being undercut all the time?

Mr Vassella : Yes, that is correct—and we are.

Senator RHIANNON: What are your recommendations on that?

Mr Vassella : As we mentioned, we think requirements around products for government infrastructure meeting Australian standards would be a very positive outcome for Australian manufacturers of all types.

Senator RHIANNON: So all steel that comes into Australia should be at that standard?

Mr Vassella : All products—and certainly steel that is used in government infrastructure projects—should meet Australian standards, that is correct.

Senator KIM CARR: Surely that is a minimum requirement? The Victorian government has taken stiffer action than that in regard to the procurement for their rail projects, for example. Is that not a more effective way, going beyond just a question of standards to the actual contracts themselves?

Mr Vassella : Again, that positive bias in terms of procurement, if that results in domestic steel consumption, is good for the steel manufacturers in Australia—absolutely.

Senator KIM CARR: Can I turn to some other areas. Your submission draws our attention to the importance of effective climate and energy policies and you have argued, as you have again repeated today, that one size should not fit all in the approach that any government takes. Can you elaborate on that?

Mr Vassella : Certainly. Our concern around the carbon tax—we absolutely support the reduction in carbon and strategies around that. That is part of our daily activities in terms of reducing our footprint as a company and as a corporate citizen. What we were very concerned about was that a carbon tax levied on Australian steelmakers, when none of our competitors have carbon tax levied on them, really results in the export of the carbon, because all you do is shut down the local manufacturing and bring the steel in from China or another country, where carbon taxes are not levied. We saw that as a very blunt instrument that resulted in carbon emissions being exported.

Senator KIM CARR: You did get significant support during the period of the ETS. How much was that?

Mr Tidd : The Steel Transformation Plan was a total of $300 million spread across two companies, Arrium and BlueScope. The allocation was $120 million dollars and $180 million dollars respectively.

Senator KIM CARR: What did you do with your $180 million?

Mr Vassella : Part of that was to offset the carbon tax that was imposed on us. The remainder of the funds—at that time, as you would remember, we were struggling to survive, but we were in fact investing in the next generation of Zincalume technology. We were investing at a time where we were financially struggling quite significantly. Those funds helped us from an investment perspective.

Senator KIM CARR: That is good to hear.

Mr Tidd : I just want to clarify that it was a deposit of $100 million out of the $180 million—it was not the full amount.

Senator KIM CARR: Yes, I administered the scheme at the time, so I am familiar with it. But you were also given significant shielding in regard to permits. Would you see any new ETS as requiring significant shielding for trade exposed energy intensive industries such as yours?

Mr Tidd : I think that principle has been broadly accepted now, because of what we all went through five or six years ago with the original carbon tax discussions and negotiations. It has to be a basic principle of any new emissions trading scheme that is ever introduced here.

Senator KIM CARR: What level of shielding do you think would be satisfactory?

Mr Tidd : As Mark has pointed out, the competitive landscape that we face is a very aggressive one, and steel is a very volatile sector. Until we see genuinely comparable emissions reduction schemes with our major trading partners, such as China, Korea, Taiwan, Japan et cetera, Australia should not be taking the lead on that.

Senator KIM CARR: So you would see 100 per cent shielding? Is that the figure you are looking for?

Mr Tidd : Yes.

Senator KIM CARR: I just wondered when we would get to that point. There are other measures as well. The clean tech program, for instance, was available for the supply chain development. Do you think that would have to be an integral part of any new ETS?

Mr Vassella : The carbon tax policy resulted in costs going right through the supply chain, as you are aware. From that perspective, anything that drives up our costs, particularly in comparison to importers who do not meet those same costs, reduces our competitiveness.

Senator KIM CARR: So you would see a clean tech type of program as part of this. What about the steel industry advocate that was present as part of that program? Was that of value?

Mr Vassella : Anything that advocates and assists us with domestic use of steel—domestically manufactured steel—is a positive from our perspective. I know the Australian Steel Institute put that in its submission as well.

Senator KIM CARR: The Industrial Capability Network—was that of use?

Mr Tidd : It has been, certainly, over the past several years.

Senator KIM CARR: All of these things are being wound back. They are still at law, but they are not actually implemented. The Buy Australian at Home and Abroad program is still there. It is just not used. Is that correct?

Mr Tidd : I think what I am hearing is that a more holistic approach for the sector is actually going to install a new bedrock of support. That certainly would be welcome.

Senator KIM CARR: I am particularly interested in the use of the arrangements around the tariff concession scheme, where a company that wants to bring imported equipment in seeks a tariff concession, but it can only do so if there are positive steps made to secure domestic suppliers and domestic product for that. Are you familiar with the way that scheme operates?

Mr Vassella : Yes, we are.

Senator KIM CARR: How useful was that?

Mr Vassella : Again, anything that results in the domestic steel industry being able to supply local manufacturing is a positive from an industry perspective. Often, much of that equipment that is brought in is manufactured in specialist facilities. It does not always have a huge volume of steel, for example, so the impact depends on the sorts of equipment you are talking about.

Senator KIM CARR: But it does have an impact in regard to the supply chain.

Mr Vassella : Correct.

Senator KIM CARR: And that is a point that cannot be—

Mr Vassella : One of the challenges for us is ensuring that there remains a manufacturing industry in Australia that we supply to, right across the broad economic spectrum.

Senator KIM CARR: A number of submissions to this inquiry have argued that the body responsible for the emergency safeguard mechanisms in terms of the antidumping regime should in fact be administered by the Anti-Dumping Commission, rather than the Productivity Commission. Do you have a view on that matter?

Mr Vassella : Yes. As we stated, that would be our preference is well. We think having that under the auspices of the Anti-Dumping Commission would increase its effectiveness, when and if it needs to be applied.

Senator KIM CARR: Can you explain why you think that would be a more effective way of dealing with this issue?

Mr Tidd : Speed and efficacy.

Mr Vassella : It seems a bit of an anomaly to us that it is not with the Anti-Dumping Commission, when the rest of the policy and the regime is. In terms of efficiency, speed and dealing with the one body, we see that as a preferred outcome.

Mr Tidd : Certainly in the last four or five years we have seen quite a positive shift and, as Mark said, it has been bipartisan support for greater resourcing and focus by the Anti-Dumping Commission on this issue. The fact that the Americans and others are now catching up and becoming even more aggressive is an interesting element to this. I think the safeguards' shift into an ADC would, again, be further proof that Australia is waking up to the threat that we have and that the ADC is perhaps the best vehicle.

Senator XENOPHON: Most of these things have been covered. In your submission, you have set out 12 proposed changes in respect of antidumping measures. Perhaps you could supplement those in terms of some of the issues raised today, particularly in respect of the Productivity Commission. The coalition did have a policy at the last election, which they said they could not fulfil because of the WTO requirements of a reverse onus of proof. Is it your understanding that in the US they do strive to look at that reverse onus-of-proof approach which seems to be more effective than what we are doing at the moment?

Mr Vassella : On that specific issue of reverse onus of proof, I would have to come back to you. Certainly, it is my perception and view that the US system is a much more aggressive system in terms of supporting local manufacturing.

Senator XENOPHON: We need that more aggressive system here in terms of antidumping and the suggestion of Senator Carr's about the Productivity Commission and its functions in terms of safeguards being brought into that.

Can I just go on to some government procurement policies. You say it is too early to tell with respect to the South Australian government's requirement for certification of Australian standard steel. Can you outline on notice—and you have referred to it in your submission—what you think would be best practice or fair practice with respect to procurement. I find it extraordinary that the New South Wales government, just a week ago, was almost bragging that they had imported 100 kilometres worth of steel rail tracks from Spain when it could have been sourced from the Whyalla steelworks. It is all part of the one industry. Could you provide us some details in respect of that?

Mr Vassella : Sure.

Senator XENOPHON: Is it your view that if the New South Wales government adopted a procurement policy close to that of the Victorian and/or South Australian governments that it would make a big difference in terms of jobs and the security of the steelworks here?

Mr Vassella : As we have outlined, we have talked about competitive neutrality in terms of governments and procurement taking account of the value that is generated by the local industry—not just employment and all the benefits that spin off and come from that, but certainly the higher cost base that we incur where some of our competitors do not pay payroll tax, for example. Really what we have asked for is a recognition of some value from a competitive neutrality perspective in terms of the procurement decisions, rather than just saying that if a product is $100 a tonne domestically and $90 a tonne as an import you should take the $10 per tonne cheaper product because it is a cheaper product. We think that is a very narrow view of procurement. We would like to see a broader perspective in relation to competitive neutrality.

Senator XENOPHON: In terms of the taxes you pay, the tax your workers pay and the money they spend in the local economy.

Mr Vassella : Correct, and the value we create in the local economy.

Senator XENOPHON: I just want to ask you a question about naval shipbuilding. I think these steelworks provided the steel for the Collins class submarines.

Mr Vassella : That is correct.

Senator XENOPHON: Have you still got the capacity to provide steel for our naval ships and for submarines?

Mr Vassella : Yes, we do. Absolutely. We would like to get it all if we could. We have a plate mill down the road here at Port Kembla that produces 220,000 tonnes a year of plate. I would not expect there to be a huge amount of plate in it, but any domestic volume that we can get we would be very happy to put that into our submarines.

Senator XENOPHON: Because we are over time, I just have two supplementary questions to put to you on notice. Firstly, can you provide more details in terms of the representations you have made in relation to procurement. I am very disappointed and appalled that the New South Wales government is not here today to give their evidence. The other issue is the effects test—you referred to that. That did surprise me to some degree. Most people think of the effects test in the context of Coles, Woolies and that sort of thing. Can you let us know what representations you made to government in respect of that and also flesh that out in addition to your oral representations. Obviously this is an issue that will have to be dealt with in the parliament.

Mr Vassella : Sure. We would be happy to.

Senator KIM CARR: Acting Chair, can I just follow up one point?

ACTING CHAIR: Sure.

Senator KIM CARR: You indicated to Senator Xenophon that there was a knock-on effect in terms of domestic sales of steel—that is, the value of the steel being purchased. I presume you meant a multiplier effect throughout the economy.

Mr Vassella : Correct.

Senator KIM CARR: There has been a submission received by the committee called The benefits of a local procurement policy for local steel in government construction. It is a BIS Shrapnel report, which was an appendix to the AWU submission. Are you familiar with that report?

Mr Vassella : Yes.

Senator KIM CARR: Would you be able to tell us whether you concur with a proposition that is put to us in that report? On page 10 it says:

We estimate the gross multiplier for the steel industry to be 2.30 (excluding imports). This means that for every $1 spent on buying domestic steel (final demand), a total of $2.30 of gross output (sales) is generated by domestic industries.

Would you be able to comment on that proposition?

Mr Vassella : I would absolutely support the proposition. I am not an economist, so I could not tell you a number as opposed to 2.3. But what I can tell you is operating here in the Illawarra we understand the value that we add as a company in terms of our steel production and the multiplier effect that has on maintenance businesses, couriers, freight companies, cafes et cetera. So we think that the multiplier effect of our employment and the employment we have in the region are very material. I do not have an absolute number for you, but I think in principle that is absolutely a correct assertion.

ACTING CHAIR: Mr Vassella, how much have the costs of energy in the UK and the costs of energy in your business gone up over the last five years?

Mr Vassella : I do not have a specific number for you, but again, as we outlined in our submission, we see, read and hear of numbers of doubling or trebling in terms of costs. That concerns us enormously in terms of the structural change that is occurring in the industry in Australia.

ACTING CHAIR: How are you going to be able to compete with nuclear nations with very little cost for base load energy—indeed, very cheap energy—as they convert from coal fire? Given that you are in an economy which is committed to renewables and subsidies of renewables, how are you going to be able to compete, given what you have just said about the escalating costs, in double figures in percentage terms of your energy inputs into your company? You have just flagged to me that today is terrible and in two or three years time, with the energy prices coming into that line item on your expense sheet, you are going to be put further under pressure by the fact that you cannot buy power at an internationally competitive price.

Mr Vassella : Whatever cost we incur, whether it is power or not, if we cannot be cost competitive with the imports that come into this country, then we do remain a viable industry. What we have been working on for the last five years is ensuring that we can be and remain cost competitive right across our entire cost portfolio, whether it is energy, labour, consumables, freight or whatever that might be. So that is our day job, unfortunately, in terms of ensuring that—whatever cost increases we incur for whatever reason—we are able to offset that escalation to ensure that we remain viable.

ACTING CHAIR: China is building 60 new nuclear power plants as we speak. That is virtually zero cost power. How do you compete with an increasing cost for your energy, which is a major input into your business, and think you are going to be competitive with them?

Mr Vassella : That is our challenge. We are happy to take it on, but that is absolutely our challenge in terms of remaining cost competitive in the face of that sort of cost pressure.

Mr Tidd : There is an aspect to that which is to do with our strategy, which is to produce premium value-added products around the world. What you are talking about would be the output of a commodity product, and we will not really be able to compete with them in terms of scale but we can by value-adding and using Australian innovation to deliver better products and a better business.

ACTING CHAIR: The one thing that I as a winemaker have found out about the Chinese is that they are very good at imitating products and they are very good at getting good at the quality in which they deliver. If I were your chairman, I would be taking those statements to the next board meeting and I would be saying: 'This is priority No. 1. How do we remain competitive with a surging energy price in this country?' Thank you very much gentlemen. I remind everybody—you and the subsequent witnesses—that answers to questions on notice will be due by 15 April, which is two weeks, which is okay. Thanks very much.

Senator KIM CARR: We have witnesses next week. If there is a possibility of getting material back before then, that would be helpful.

Senator XENOPHON: I will put some questions on notice as well by Monday.

ACTING CHAIR: Assuming you have the questions to answer. I know you have some from Senator Xenophon already, but there may be some in writing. So we would ask senators to get those in.

Senator KIM CARR: Thank you very much.

ACTING CHAIR: Thank you very much.