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Inquiry into proposed increase in steel prices



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(s-ySMr-^oU FOR PRESS

STATEMENT BY THE PRIME MINISTER, THE HON. E.G, WHITLAM, CMC,

INQUIRY INTO PROPOSED INCREASE IN STEEL PRICES

Canberra 8 February 1973

On 12 January I announced that the Government had

appointed Mr. Justice Moore , Acting President of the

Commonwealth Conciliation and Arbitration Commission, to .

I . . · » ^ · · i i * Λ

conaucc an inquiry χηυο proposed increase is m one price oi

steel by The Broken Kill Proprietary Company Limited„ The

Company, on behalf of itself and. its subsidiary company

Australian Iron and Steel Ptye Ltd., had requested, that their

case for an increase in steel prices be promptly examined,

M r e Justice Moore has now completed his inquiry,

1 have received his report today and consider that it ought,

to be released immediately for public information. Accordingly,

a copy of Mr , Justice Moore’s report is attached,

I would expect that The Broken Hill Proprietary

Company Limited will study the report closely, and be fully-

guided by it.

INQUIRY INTO STEEL PRICE INCREASES PROPOSED

BY THE BROKEN HILL PTY. CO. LTD. &

AUSTRALIAN IRON & STEEL PTY. LTD. ;

'X . ' . 1 ' ■ . ! ■

Report By

MR- JUSTICE MOORE

V"

8 February, 1973.

NATURE OF INQUIRY

This is an Inquiry conducted on behalf of

the Australian Government in relation to proposed

steel price increases by The Broken Hill Pty. Co. Ltd.

and Australian Iron & Steel Pty. Ltd. The document

dated 12 January, 1973 by which the Prime Minister

appointed me to conduct the Inquiry asked me to inquire

into and to report as soon as practicable whether the

steel price increases proposed by The Broken Hill Pty.

Co. Ltd. and Australian Iron & Steel Pty. Ltd. are

justified in whole or in part. In conducting the

Inquiry I was to have regard to -

(a) cost increases incurred by the steel /

industry sections of the companies that

' would not, without the proposed increases

. be recouped by the companies in prices;

(b) - the level of profits earned in the steel

industry sections of the companies in

relation to the funds employed in

those sections; and

(c) any other matters that I might consider

relevant.

TABLE OF CONTENTS

NATURE O F 'INQUIRY

PROCEDURE

COMPANY SUBMISSIONS

General

Particular

*

GENERAL COMMENTS

Inflation

CONCLUSION

Pacje

1

2

5

6

13

13

17

Appendix A

Appendix B

Appendix C

Appendix D

Press Statement of 15.1.73

Advertisement of 16.1.73

Press Statement of 23.1.73

List of Submissions

2.

In some of the submissions put to me it was

suggested that it was open to me under (c) to look into

other activities conducted by The Broken Hill Pty. Co.

u L t d . , such as its Bass Strait oil interest. I wish to .

make it clear at the outset that I regarded the specification I i

■in (a) and (b) of "the steel industry sections of the

companies" as precluding me from looking into other ■

activities of the company under the more general terms

of (c) when answering the question which I have been asked.

PROCEDURE

In the terms of the Prime Minister's letter it

was left to me to "conduct the Inquiry in such manner"

as I might determine although of course this was subject

to the overall requirement to report "as soon as practicable".

The method adopted was to invite written submissions

and also to invite anyone who had made written submissions

to speak to them in public. This was given publicity,

both by a press statement and an advertisement in the

major Australian morning papers. Copies of the press

statement and the advertisement are appended. A copy of

a further press statement I made after most written

submissions had been received is also appended. To show

the variety of people who responded to my invitation there

is also attached to this report a list of the persons from

whom submissions were received. It is worth recording that

with one possible exception no substantial user of steel chose

+· /-> tv» V o i -1 -Nvn 4 r* V1 rvr*.

3.

My reason for taking the course outlined arose

from a consideration of three matters. The first was

to ensure reasonable expedition, the second to give

everyone interested the opportunity to make submissions

and the third t o ,give the public some knowledge of the

submissions being made. It would have been inconsistent

with the task given to me to have allowed a protracted

public hearing, and I think it would have been against the

public interest not to have at least one open hearing. This

hearing irf the event lasted only one day even though no

time limit was in fact placed on any speaker. At that

hearing oral submissions were made only by The Broken Hill

Pty. Co. Ltd., Mr. A. Shepperd a Shareholder in

The Broken Hill Pty. Co. Ltd., the Australian Council

of Trade Unions, The Victorian State Council of the

Amalgamated Engineering Union, the Australian Meat & Wool

Producers Federation and the Australian Consumers .

Association. . . I

I also ruled in the interest of expedition

that the written submissions were not to be exchanged.

This meant that persons making submissions, both written

and oral, did not have the advantage of seeing the written

submissions of others, although when they made oral

submissions they had the advantage of having heard

earlier oral submissions. The fact that the written

4 .

submissions were not exchanged and were not available

to interested parties was the subject of some criticism

from a number of sources, in particular, from the A.C.T.U.,

This criticism was basically that no one other than the

13. Η . P . knew in advance either the amount of the increase

proposed or the basis of its proposal including the facts

upon which it was based. I have no doubt that the action I

took was proper in the particular circumstance of this '

Inquiry, but I draw attention to this criticism for

consideration in relation to future inquiries„ In the !

field cf wage fixation by Australian Tribunals the

tradition has been for public disclosure of the claims,

public debate about them and finally, publicly disclosed

reasons for decision of the Tribunal. I realise that the

nature of any prices justification tribunal is a matter

of policy decision for the Government but I consider it

proper to draw attention to the dilemma which arose

between the desirability for expedition and the protection

of confidential information on the one hand, and, on the

other, the desirability of proceeding in a manner which

allowed public knowledge of the increases sought and the

reasons advanced in support, together with some public

debate about them.

5.

The Government made available to me the

services of Prof. Chambers, Professor of Accounting at

the University of Sydney and Dr. Gregory, Senior Fellow in

the Economics Department in the Research School of Social

Sciences at the Australian National University. They

read the various submissions and had discussions, both

between themselves and with me. Their'assistance was

of great benefit and although the"conclusion reached is

my responsibility alone, their contribution to the '

Inquiry was; invaluable and I wish to thank them publicly

for .'.it. It seems to me that any prices justification

tribunal would be in serious trouble without accounting

and economic and perhaps other expert assistance.

• COMPANY SUBMISSIONS

General

The company expressed a view that it should

be entitled to fix its prices in accordance with what

it considers to be appropriate commercial considerations,

and that any Inquiry which is entered upon should be

limited to ensuring that, in pursuing its pricing policy,

the company is not improperly taking advantage of some

special position it might have, and, in so doing,

establishing prices which unduly favour its shareholders

to the detriment of its customers and the public at large.

6.

I am of the view that a very important

consideration should be the public interest and how

the public may be affected by any proposed price increase.

Depending upon the view taken of the meaning of the -

second half of the company's proposition set out above, \

there may not be much difference between us, but I do

not accept as necessarily correct the proposition that

the starting point should, be the commercial views

of a company seeking to justify a price increase * What

any company considers to be proper commercial considerations

may itself, in my view, be open for review by a prices

justification tribunal.

Particular .

The company based its case for justification

under four main headings =

(a) the low level of profitability

of the steel industry;

(b) the need for an adequate return

to support further investment;

(c) the high level of the unrecouped

cost increases;

(d) the favourable level of steel

prices to domestic consumers.

7.

In its submissions, both written and oral,

it elaborated those four broad points and used certain

statistical data to support them.

In view of what I am about- to say regarding

this material I should point out that in the letter

forwarded with the written submissions to me, B.H.P.

said "We have endeavoured to cover in this submission

all the principal factors which seem to us to bear on

the question of justification. At the same time we

have felt it desirable to confine the submission to

one of reasonable length, and for that reason we

have not dealt with the subjects exhaustively. Our

officers are available to elaborate on any aspect

or to respond to any questions you may wish to raise."

I appreciated the offer but did not take

advantage of it because it seemed to me that for both

reasons of time and because of fundamental differences

of approach to the figures, a request for further

information in a short period would not have been

practicable. The whole range of extra data and the

analysis of it which would have been necessary perhaps

to enable me to form any view other than the one I

have reached would have taken a long time, probably months

δ.

The time factor of course contains two elements ,

perhaps related to one another. The first is that

the company wished to apply the increases proposed

from 1 February, 1973 and the second that I was

asked to report "as soon as practicable"=

• The financial information available, both !

from BcH-Ρ.'ε annual reports over the last four years, !

1969 to 1972 and from its submission is insufficient to

allow any tight reasoning about the profitability of

the steel producing sections of the group. For instance,

nowhere in the submission is there any break down of

the figures which appear in the company's annual reports

for total income and total investment. It might reasonably

have been expected that the company would anticipate the

use of its published figures by objectors to its

proposals and that knowing that only its published reports

were available it would have provided some analysis of

the published figures indicative of the profit of the

steel industry sections„

The submission provides some evidence and

argument on particular points but none of it can be

linked with the published figures to yield an overall

indication of the precise effect on the company? s

results of a variation in steel prices. In the

circumstances I find it impossible to assess a "proper"

level of profits but some questions may be raised as to

9.

the company's argument in respect of its profitability.

The argument relied upon by the company

and by Mr. Shepperd related to the amounts available

for distribution to shareholders, that is, the profits

after tax but the amount of profit after tax may be

affected by the incidence or changes in incidence of

tax rules and concessions and by the different

considerations of a company from year to year taken to

secure advantage of tax concessions. The trend of

trading profits before tax is therefore the proper

figure, in my view, to take as an indication of the

trend in profitability.

. Even on this basis there are many methods of

estimating profits and profitability. From figures

available (excluding the figures of Hematite Petroleum

Pty. Ltd. from group figures) some of these methods show

little change since 1969 and some show a slight

deterioration in the relationship between profit before

tax and funds_employed. It is impossible to reconcile

the figures for profit before tax in the annual report

with the confidential figures supplied to me in the

company submission. In any event the analysis of the

company's published annual profits can proceed only

as far as May 1972 whereas much of the company's case

on unrecouped cost increases depends substantially on

increases since that date.

10.

Since May, 1968 the company has made annual

charges against gross revenues for "fixed asset

utilization”. For many years before that date the

company followed a not dissimilar practice. The

present practice of the company has been the subject

of critical comment and it has been suggested that

it makes it more difficult to compare the profit of

the group and this section of the group with other :

companies. Although the method adopted by the

company may be accepted as a proper one and as being

a legitimate and genuine attempt to cope with the

problem of rising costs, it is in the company's view

a policy not commonly followed by other companies in

Australia. However, the practice followed by other

companies is itself so variable that it is difficult

to attempt to comp ex re the profits of the B.H.P. group

with profits of other companies and indeed of other companies

amongst themselves. Ic is hazardous to take the reported

profits of any company as indicative of the whole of

its gains,

Despite all these comments as far as can

be judged from such comparisons as can be made from

the material available it would appear that net profit

rates in the steel sections of Î’,Κ.Ρ. are and have

been low by comparison of those of many other established

companies. Having said that, however, one must

11.

immediately go on to say that it is not possible from

the information before this Inquiry to estimate with any

precision the effect of any specific price rise on the

profitability of the steel industry sections of the

company.

It was admitted by the company that the

sale of steel had been slack over the last year or so and

that sales in the future should be better. This in

itself may cause a rise in the profitability of the

steel sections of the company because it will enable the

company to take up its unused capacity and thereby

presumably reduce the unit cost of production of

steel and steel products. Although in the. confidential

material supplied there is information indicating

anticipated sales there is no detailed profit forecast

for the 12 months to come. A forecast of this kind is

probably necessary to test the validity of the company's

forecast as to what is necessary by way of price increases.

The company also based its case on a relative

deterioration of revenue by comparison with cost, in

other words that its prices have risen by certain amounts

whereas specified costs have risen by other amounts.

The object of the price increase proposed by the company

is to put prices and costs in a somewhat similar

relation to their relation at some prior date. The

change in the relationship of costs and prices should

12.

be and has been considered along with such evidence

as I have of productivity changes„ *

The A . C . T . U „ submitted that it was relevant ■ P

for this inquiry to investigate the efficiency of the

steel making sections of the B.H.P. group. In reply

B.H.P. asserted that for a number of reasons it is an

efficient producer of iron and steel. It pointed to the

fact that its domestic selling prices compare favourably ' ' i

with those of overseas producers, that during most of the

last six years Australia has exported more steel than it

has imported, and that its growth in productivity

compares favourably with that in most overseas countries

other than Japan.

I consider that the question of the efficiency

of a company is a matter which can properly be looked at

in considering an increase in its prices, certainly

one of the magnitude asked for now. While accepting fully

that what the company has to say is its genuine view of

its own efficiency I find it difficult to accept that its

efficiency should not also be examinable by outsiders,

To accept a company's estimate of its own efficiency,

even with the material to which this company referred,

would be taking a risk in an Inquiry such as this.

13.

GENERAL COMMENTS

It will be clear that in my view this Inquiry

has not been able in the time available to examine in

depth all the material put forward by the company or

indeed some of the material put forward by others, such

as the A.C-.T.U. submission on the possible effects of ' . i

revaluation. I do not propose to discuss every possible

economic result which might flow from an increase in

steel prices. Howeverf the company did rely on the fact

that the domestic price of steel was low and I have

therefore decided to make pne comment of a general kind.

Inflation

Even though it is not denied that the domestic

price of steel in this country is relatively low compared

with other countries the question of the inflationary

effects of any increase in the price of steel is. in my

view, most relevant to this. Inquiry. It is first necessary

to consider whether because steel is such an important

commodity for so many activities in the community some-

greater care should be exercised in considering increases

to its price than to the price of some less important

product. My prima facie view is that such greater care

should be taken, because a mistaken view about the

appropriate upward price movement for steel could have a

much more serious effect on the public generally than a

C"

14.

mistaken view about many other products. I do not overlook

the fact that a different mistaken view about the price

of steel might have an adverse effect both on the

; B.H.P. and its shareholders, many of whom rely for

' their income or a large part of it on those shares.

I It is a delicate question of balance but in my view

! if there is any doubt the interests of the public would

have to prevail over the interests of Î’,Η.Ρ. and its

shareholders. If such a view about steel continuedjto

be taken over a long period of time it might have the

effect of keeping down increases in the price of steel

to such an extent that it might be difficult, to retain

investment in or attract it to the steel industry =

If that happened then a prices justification tribunal

.might have to change its view or some other remedial

action might have to be considered.

The B.H.P. has given some examples of the

order of increases in direct costs which in its view

would flow from the increase it seeks. It cites for

example, an increase of about $13 on the various iron

and steel products in a medium-sized motor car or of an

extra 75Φ on the same products in a .14 cu. ft. refrigerator.,

It did e m p h a s i z e h o w e v e r , that the cost effect presented

by such figures represented, the additional cost to

"first line" users and not the cost that would eventually

be passed on to the ultimate consumer„ It agreed that

15,

the multiplier effect of costs arising from an increase

in basic steel prices would of course cause greater

increases than those mentioned and their magnitude'would

be dependent on various other factors„ For my purposes

the relevant price increase in products using steel which

might flow from the increase now sought is that of the

consumer of the product using steel who would have to pay

much more than the figures quoted. Moreover I cannot

oveirlook the possible effect of a substantial increase in

steel prices particularly if it had the imprimatur of this

Inquiry. It is my estimate that there could be some

sections of industry and commerce which would regard this

as a green light for increases of at least the same

magnitudef whether such increase could really be justified

or not and whether the products or services concerned

use steel or no t . Therefore in the immediate situation

which is in any event one of some inflation the amount

of price increase which the B.H.P. seeks to justify would,

in my view, add a considerable impetus to current

inflation. If this is considered to be a hard line to take

merely because sceel is such a basic product then I must

again emphasize the importancef in my viewf of the

overall public interest.

16. • ►

One user of steel in the electrical appliance

industry protested strongly against any increase in the

price of steel and said that any further cost burden as

to steel "at the present time would be disastrous to the

appliance industry" although it gave no detailed information

to support this allegation. It pointed out that its position

on the export market might also be seriously effected.f a

position about which it is already concerned because of

the effects of revaluation. One can say as a general

proposition that to the extent Australian exports are

manufactured from steel, our export potential may be

reduced through increases in the price of steel but in

considering this factor attention would also have to be

given to movements in the price of steel in countries

which are our competitors for those export markets. In

the B.H.P. submission increases in price of steel in

other countries are imminent. More importantly however

submissions such as the one quoted would need much closer

scrutiny from experts to test their validity and the

result of this closer scrutiny would have to be balanced,

against the closer scrutiny of proposals about price

increases.

I have considered the effect on primary

producers of an increase in the price of steel. Any

increase in the price of steel may have an adverse

effect on them but. their situation is the same as that

of any other user of steel and is part of the total

public interest which I must consider, .

17-

c o n c l u s i o n

I have given careful consideration to the

A.C.T.U.'s proposal that this matter should have been

deferred until the proposed prices justification

tribunal had been set up o r , in the alternative, that

a course: of action be adopted which would inevitably

have lengthened the Inquiry. In my view, under the

terms of reference, neither of these courses were

open.

I have specifically applied my mind to the

matters to which I was asked to have regard in the

document establishing this Inquiry. The matter to

which I have referred other than those specified in

(a) and (b) is inflation, although I am aware that

other economic matters such as the effect of .

revaluation might also have been considered relevant

had time permitted fuller consideration of them.

To my mind the essential word in the terms

of this Inquiry is the word "justified". This connotes

that those seeking a price increase carry the responsibility

of adducing adequate grounds for it. In my view if having

looked at all the material put by the company and the

comments made on it I have not a comfortable satisfaction

r~

18 „

that the material warrants the increase sought then

the increase has not been justified. For the reasons

given earlier the Î’.Η,Ρ. has not satisfied me on the

material it has put that a price rise of the nature

it asked for is justified.

However, it has shown some increases in

cost, its level of profit in the steel industry

sections is not high and it is notorious that costs

generally are rising in the manufacturing sector.

Moreover there has been no increase in the price

of steel products in the last 13 months. It is

a fair conclusion that a prices justification tribunal

after an Inquiry of the kind I have predicated would

have found justification for some increase. As this

is the first Inquiry of this kind and as the company

was without guidance as to what might be expected of

it I am prepared in all the circumstances to say that

even on the incomplete material before me an overall

increase of 3% is justified if it is arrived at in the

manner in which the company arrived at its 7.11%.

This increase should, in my view, not be

retrospective but should operate from 1. M a r c h , 1973.

APPE N D I X A

STATEMENT BY MR. JUSTICE MOORE

15 January, 1973

The manner of conducting the inquiry on behalf of

the Australian Government in relation to proposed steel

price increases has been left to me and I have been

asked to report as soon as practicable.

In order to achieve both fairness and expedition it

seems to me that I should lay down the following timetable

and invite compliance with it by anyone who may be

interested to participate in the inquiry. I would ask that

any person or organisation who wishes to make submissions

in this matter should make, them to me in writing by

Monday next, 22 January addressed to the Associate to

Mr. Justice Moore, 75 Elizabeth Street, Sydney. I shall

then sit in public at 10.00 a.m. on Friday, 26 January

in Sydney to enable people who have made written submissions

to speak to those submissions, if they wish to do so.

I do not intend that the written submissions should then

merely be read because I will already have read them, but

in my view it is proper that an opportunity should be

afforded to interested people briefly to state their

attitudes publicly. I propose to apply a time limit to

the submissions to be made then because it is not my

intention that this should develop into a long public

inquiry. ,

A P P E N D I X B

ADVERTISEMENT

. 16 January, 1973

Commonwealth of Australia

• INQUIRIES TO PROPOSED STEEL

PRICE INCREASES

Any person or organisation, wishing to

make submission to the above inquiry are

invited to make them in writing to reach

Mr. Justice Moore by Monday, 22 January.

They should be addressed to the Associate

to Mr. Justice Moore, 75 Elizabeth Street,

Sydney, 2000.

There will be a public sitting of the inquiry

at 75 Elizabeth Street, Sydney on Friday 26

January at 10.00 a.m. to enable those who have

made written submissions to speak briefly to -

those submissions if they should wish to do so.

A P P E N D I X C

STATEMENT BY MR. JUSTICE MOORE

23 January, 1973

I have received written submissions from .

22 persons and organisations in connection with

the above Inquiry« They include the A.C.T.U.,

Australian Wool and Meat Producers Federation,

Australian Farmers Federation, Australian Consumers

Association and the Australian Shareholders Association,

Of these a number have indicated that they wish

to make oral submissions on Friday next, 26 instant.

Proceedings on Friday will commence with oral submissions

by a representative from the B.H.P. followed by any

other person who has made a written submission in support

of a price increase and wishes to be heard. A.t the end

of those submissions the representative of the A.C.T.U.

will be heard and he will be followed by any other ·

person who has made a written submission against a

price increase and wishes to be heard. Finally, the

B.H.P. will have a brief right of reply. As far as I

can see at the moment, the submissions should be concluded

within one day and as I indicated earlier I w i l l , if

necessary, impose time limitations upon those wishing to

address me.

2.

The Federal Government has allowed me to seek

the assistance of one Economist and one Accountant.

The Economist will be Dr. Gregory of the Australian

National University and the Accountant, Prof. Chambers

of the University of Sydney. Their role will be to

discuss with me in private the various submissions ·

made both in writing and orally and to give me expert

advice and assistance.

APPENDIX D

LIST OF PERSONS AND ORGANISATIONS

WHO MADE SUBMISSIONS

Name

1„ James P „ Graham

2c LcE. Case

Designation

Shareholder

Lecturer, School of Accountancy r University of N.S.W.

3. J.O. Miller Accountant

4. Australian Wool and Meat Producers Federation

5. John R, Horne Shareholder

6. T „ M . Fitzgerald Senior Research Fellow,

Institute of Applied Economic & Social Research f University of Melbourne.

7, Australian. Farmers' Federation

8„ P.E.M. Standish Reader in Accounting,

Department of Accounting & Public Finance, Australian National University

9c L. Feher Chartered Engineer

s · ' ■ ·

2

11 .

12.

13.

14.

15.

16.

17.

18.

19.

■20 .

2 1.

10.

Maine

Earthmoving Edges Engineering C o .

(Name withheld by request)

Siddon's Industries Limited

Australian Automatic Productions Pty. Ltd.

Designation

User of Steel

Teacher

User of Steel

User of Steel

Lloyd Taylor

L.B. & J.N. Durno

Dr. D .W. Neville M.B. B.S

Albert Shepperd

User of Steel

Shareholder

Interested member of public

Shareholder

Australian Consumers' Association

Victorian. State Council, Amalgamated Engineering Union.

Australian Shareholders' Association -

Australian Council of Trade Unions

2

Name Designation

22. The Broken Hill Proprietary Co. Ltd.

23. R.W. Gibson Head, Department of

Business Studies, Gordon Institute of Technology.

24. Dr. Susan Bambrick Department of Economicsr

Australiaη Naticnal University.

25. James N. Kirby Pty. Ltd, User of Steel

Ian G . Sykes AAIJV5Mf AASA r B.Sc. B. Com. Interested member of public

27. Industrial Engineering Limited User of Steel

28. Da Tel Inc. A Peace Memorial Research

Foundation

29. South Coast Conservation Society