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Economics References Committee
05/04/2016
Future of Australia's steel industry

YOUNG, Mr Stephen, Managing Director, E&A Ltd

[15:25]

Evidence was taken via teleconference—

ACTING CHAIR: It is very nice to talk to you. I am trying to visualise you here in front of us in the Whyalla council chambers. I am sorry you cannot be with us but understand you are in Perth and on business there. We thank you for your time. We have your submission, which has come in today. Would you like to state anything about the capacity in which you appear?

Mr Young : I am the managing director and founder of E&A Ltd, which is an ASX listed public company. The company has 10 operating businesses, three of which are based in Whyalla: Heavymech, which is a small machine shop, ICE Engineering and Construction—you have already heard from Mr Bindi, who is the managing director of that company, earlier today—and Ottoway Fabrication, which is a heavy engineering business and has within it a wind tower fabrication division.

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, and then the senators will ask you questions.

Mr Young : I will try to keep my comments to five minutes. I realise our time is very tight. First of all, I want to thank the Senate and, in particular, the senators for visiting Whyalla. I think it is very important that you, firsthand, get a feeling of the sentiment that exists in the city at this point in time. Whyalla is a city that is in crisis. It is a place where the harsh social consequences of successive Australian governments' free and fair trade policies, in particular that policy as rolled out through bilateral and multilateral free trade agreements, have been realised. Already, nearly 1,000 Whyalla residents have lost employment, as Arrium and OneSteel have moved to make their businesses more efficient. In some respects that is just—these are my words—business as usual, but what is now before the Whyalla community is nothing short of a crisis. In the event that Arrium were not to continue, a further 2,000 employees and contractors would lose employment, and my assessment is that probably a further 1,000 people within the community of Whyalla would lose employment over the ensuing six months following closure.

Arrium and OneSteel employ about 25 per cent of the city's employees. They earn about 35 per cent of the income generated in the city. I am sorry, I am a businessman, not an economist, but my back-of-the-cigarette-packet assessment of the likely social cost to the federal, state and local budgets is in the order of $100 million per annum. So, apart from the consequences of people not having employment and living off social welfare, the government faces, in the event that Arrium and OneSteel close their iron ore and steel-making operations, a very significant annual recurrent cost.

The point that I particularly want to make is that these individuals who lose employment will not be able to secure employment elsewhere: they are four hours from the city of Adelaide, and obviously that is not an effective commute; fly-in fly-out opportunities are currently not available to skilled tradesmen; and, more importantly, they will be—my words—trapped in their own homes. They will not be able to sell their homes. There are already 1,000 homes for sale in Whyalla, and if another 3,000 people were to lose their employment, there will be thousands of homes for sale. Their homes will be without commercial value and many of these individuals will not be able to support their mortgages; we will be left with a social crisis, in my view, which basically we have not seen in Australia since the Great Depression.

There are a number of alternatives to closure. The most significant thing that I wanted to share with the committee was on the one hand you have the social costs of closure and on the other hand you have the what I believe is a workable bridge between the cost of keeping Arrium going and the cost of closure. Arrium have already identified $100 million worth of saving. They are looking to bridge another $60 million, and with the federal government's initiative of placing the rail line order the number may well be down to $40 million; with the employees making a contribution, the number could be in the order of $20 million. My view is that while the economic rationalists will want to say that free trade creates great benefits, that needs to be balanced against the reality that in certain exceptional circumstances businesses will not be able to adapt fast enough to be part of the future economy, communities will not be able to adapt fast enough to be part of the future economy. I am talking about the cities of Whyalla and Wollongong in particular. I spelt that out in my report.

I just want to make two other comments in closing. The first is that no matter what government does there is a potential that the stakeholders will not be able to agree. In the event the stakeholders are not able to agree, I implore the government to arrive in Whyalla with the financial resources ready to initiate a number of shovel-ready projects so that the level of unemployment is minimised. I have given you examples of some projects that could be considered in the event—notwithstanding the government's best endeavours—Arrium and OneSteel were to close their operations in Whyalla.

The second comment is that no matter what the government does, Whyalla remains too dependent on Arrium and OneSteel. In the long term, the government should be thinking about things that it can do to initiate higher levels of employment away from the steel and iron ore quarrying or mining operations. In particular, I want to encourage the committee to think about Whyalla as a place that nuclear waste disposal could be received. I also want to encourage the committee to think about the Defence industry and how they might be able to channel revenue that has been spent in the Defence industry into Whyalla, obviously in addition to the substantial need for that activity to be channelled into the multi-user facility in Port Adelaide. I am sorry to rush, but they were the highlights of some of the comments in the report that I submitted to you this morning.

ACTING CHAIR: Thank you, Mr Young. As always, a concise contribution, but with many, many aspects that people in government can consider. You do have former life experience in the reconstruction of companies and you have an excellent reputation in turning things around with companies. Do you think that in 2000 with the way in which Arrium was spun off that the die was cast for this industry and that it has been limping along for 16 years?

Mr Young : Clearly BHP divested Arrium because they thought it would have a better life independent from BHP Billiton and they most probably were uncertain about its capacity to contribute to the greater BHP. I am sure they would not have foreseen today's crisis but they could have anticipated a set of circumstances where that might have evolved and certainly they made a decision that steel manufacturing in Australia was not a business that they wanted to invest more money into. So there is a degree I guess of inevitability about where Arrium is today. On the other hand, only three years ago the board of Arrium rejected, with the benefit of hindsight now, what was an exciting offer from Posco, a Korean steel manufacturer, who at that point in time stated that their ambition was to modernise the Whyalla plant.

That was a definite attempt by me to say yes and no at the same time. I think today could have been anticipated and I also think that today could have been avoided. Very importantly, from my submission I think Arrium will require help to survive, but I think the business has a viable future and everyone should put their shoulder to the wheel and make sacrifices in order to deliver that future.

ACTING CHAIR: Mr Young, I do share your optimism about steelmaking in this country. I certainly share your optimism about steelmaking in Whyalla, although I am fearful of a $3 billion debt when commodities are trading at what they are and when there is a glut of steel. It may well be that steelmaking is a profitable business in Whyalla but the business model that currently surrounds it is not. That is something you may or may not choose to comment on before I go to other senators.

Mr Young : I think most probably, to state the obvious, currently the Arrium board have put before the Arrium banking supporters—it is not a syndicate as I understand it, but it has got 14 different banks in it—that they take a very significant discount on the face value of their debt. That clearly is recognition that the current business model is unsustainable. As I said, I think everyone is going to have to make a contribution if Arrium's iron ore operations and OneSteel's steelmaking operations are to continue in Whyalla. The central thrust of my presentation to your committee today is to implore the federal government, the state government and the local government to make their contribution towards this outcome.

Senator KIM CARR: Mr Young, your submission is timely. I do think we could explore still further whether the problems with Arrium are to do with the mining side of the business rather than steelmaking and I think the contrast between what is happening with Arrium and what is happening with BlueScope could be more closely investigated. What do you say to that?

Mr Young : I am obviously not involved in the management of the business. I sit outside the business and do not have detailed firsthand information, and I should obviously qualify my response with that observation first of all. Having said that, Senator Carr, the decision that was made in different times by the Arrium board to expand the company's operations in the Middleback Ranges and then to acquire the Peculiar Knob iron ore facility has, with the benefit of hindsight, been a mistake. The debt that was incurred in making those acquisitions is currently not repayable, or would not appear to be repayable, and my understanding is that those operations have been running on a cash-flow-negative basis, and they are struggling currently to get them to break even.

It is always easy to be wise with the benefit of hindsight. In my life I have most probably made more mistakes than Arrium, so I am always somewhat reluctant about criticising businesspeople who try and make good decisions at the time. They obviously thought that the decision to expand iron ore would protect the steelmaking business. That, as you have commented today, has proved not to be the case. Such is life.

Senator KIM CARR: Yes. Always we are reluctant to be retrospectively wise—I have noticed that a lot in politics! It does go to the question of the national interest—to whether or not it is in Australia's interests to preserve the steel industry. What is your call on that?

Mr Young : My view is that Australia needs a defence industry. My view is that the defence industry needs a steelmaking industry.

Senator KIM CARR: I see what you are saying.

Mr Young : And so steelmaking is, in my view, an essential part of having the capacity to defend yourself in adversity; for that reason, I believe we need a steelmaking industry.

Senator KIM CARR: That goes to whether or not the Commonwealth should show leadership here. You have spoken about the need for the Commonwealth to invest in this industry in a range of ways, not necessarily by equity but in other ways as well. What is the scale of the investment, in your judgement, that is required?

Mr Young : Again, I would like to qualify my response by saying that the $100 million cost of that to the federal, state and local government budgets is my estimate of the cost—and, Senator, you may well be in a position to confirm that I am in the right ballpark. I have done it with my knowledge of what unemployment benefits cost, my knowledge of how much tax is paid and a bit of a sense of what royalties and other rates and taxes might be paid. But my guess is that I am pretty much in the ballpark.

Senator KIM CARR: So you are saying: it would actually cost the Commonwealth budget more to let the steel industry go than it would to preserve the capability—is that the submission?

Mr Young : And, in my view, by a multiple of three times; my view is that the amount of money that is required to keep OneSteel and Arrium in business is one-third of the financial cost of letting them go out of business, without taking into account the very real human costs of having one-third of a city isolated from employment—

Senator KIM CARR: It would be much more than a third; the way I read it, it would be very difficult to sustain this city without a major employer like OneSteel.

Mr Young : Yes. So it could be worse than a third. I am trying to be balanced in what I am saying, but at the same time I am aware of the submissions that you have received and I am quite deliberately taking—mind you, at five minutes to midnight, with Arrium in the middle of a trading halt—advantage of the opportunity of today to remind the Senate—hoping that you will, in turn, talk to your colleagues from the lower house—of just how serious this matter is, because I do not think it is broadly understood outside the city of Whyalla.

Senator KIM CARR: I think the general view of the committee is that we remain optimistic rather than pessimistic about the capacity of this country to sustain a steel industry. I cannot see any ostensible reason why we, as a nation, cannot do that. The question is: what is the policy setting to secure that outcome?

ACTING CHAIR: I guess that is why we are here today. I will just go briefly to Senator Simms and then to Senator Xenophon, and then we will be wrapping up.

Senator SIMMS: Mr Young, I just want to flesh out the points that you made around free trade agreements. Is your proposition that the way, or one of the ways, to support the steel industry in Australia would be through having local, Australian made, procurement policies or policies that encourage that?

Is that your position? I just did not notice you mentioned that in the submission.

Mr Young : Yes, I have mentioned it in my submission, but I did not in my verbal address. Under point No. 2 of my presentation, under the section 'Whyalla in crisis', I did say 'a more vigorous and timely application of Australia's WTO compliance antidumping system' and, under point No. 3, 'the appointment of a steel industry advocate in order to ensure a bias towards local procurement, as exists in the USA and Canada, including the adoption of more rigorous Australian industry participation plans with lower financial thresholds'. The current threshold is $500 million for Australian industry participation plans; in my view, that is far too high and a much lower number should be adopted.

In answer to a question, either you are a supporter of free trade or you are not. I am a supporter of free trade but I say that, in certain exceptional circumstances, the government need to provide—in my words—air cover, an umbrella, support or a safety net, whatever words you want to use, to enable a business to transition from where it was to where it needs to be. In my view, it is a mistake for Australia to lose its steel manufacturing industry, and it should not allow that to happen. One of the things that we need for that industry to be successful is ongoing demand. There is no point in supporting it and not having it manufacture steel.

Senator SIMMS: Thank you, Mr Young.

Senator XENOPHON: Mr Young, very quickly, because we are running over time: if we adopted a more vigorous and timely application of antidumping systems, as you refer to in your submission, and had a stronger procurement policy to buy local, if you like, or one that takes into account economic benefit, would those two matters alone, done properly, make a big difference to the future of Arrium?

Mr Young : I think they would make a very big difference. Obviously, the question has been asked of Arrium, but one of the problems that Arrium faces is that currently it is running significantly below its boilerplate capacity and it has quite significant fixed costs. In the event you can increase throughput, that makes a significant difference, as the fixed costs have already been recovered.

Senator XENOPHON: All right. Could you be pretty succinct with your answers. In terms of energy costs, it is my understanding that they are higher in this state than in other states; does that make a difference for a company, such as Arrium, in an energy-intensive industry?

Mr Young : Yes, it does make a difference, obviously. Again, Australia has renewable energy policies, so arguably they have had a positive effect, according to the Warburton review on the wholesale cost of power. Notwithstanding that, I do believe that our power costs are significantly higher than the costs enjoyed by Arrium's competitors overseas, and therefore power costs are an issue and any solution that helped Arrium with that would be a positive contribution.

Senator XENOPHON: Sure. Finally, you have talked about the impacts of this in Whyalla. What do you see as the statewide impacts if Arrium no longer produce steel here? We heard evidence earlier that up to 6,000 jobs could be lost in this community, which would be devastating. I think Mr Bindi from ICE Engineering said that it would become Australia's biggest ghost town. What would the impact of that be on the state's economy as a whole? Have you done any assessment of that or considered that at all?

Mr Young : I have done no assessment. I do say that Whyalla is in a different category, because of its geographic location and its lack of other employment alternatives, from even the city of Elizabeth, which, clearly, with the automotive industry closing, also faces very significant challenges. But the people of Whyalla have no genuine alternative other than to be part of the social welfare safety net, which is a huge problem in the long term.

Beyond Whyalla, there will be knock-on effects. There will certainly be a very significant loss of confidence in the broader South Australian community, and it could not come at a worse time. Certainly, my submission calls upon the federal government, state government and local government to really focus on Whyalla. Whyalla is potentially going to go through a crisis that would be, in my words, as bad as we have seen since the Great Depression. You only need to look at history to see what the real cost is of one-third or more of the community being unemployed long term.

Senator XENOPHON: Thank you.

ACTING CHAIR: Thank you very much, Mr Young. I thank you for joining us online and look forward to seeing you back in South Australia soon. That concludes our hearing today. Thank you to all other witnesses who appeared, and to Broadcasting and the secretariat. Once again, thank you to the Whyalla people for taking us in today. The committee stands adjourned.

Committee adjourned at 15:51