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Issues relating to the Fuel and Energy Industry

CHAIR —I welcome Mr Cornish and Mr Thomas from Bluescope Steel. If at any stage during the hearing you feel that you would prefer to provide evidence in camera, if there are issues of commercial in confidence that you do not wish to have on the public record, please make sure that you let the committee know. I invite you to make an opening statement.

Mr Cornish —Thank you. We appreciate the opportunity to give evidence today. We note the committee’s broad terms of reference. With the committee’s indulgence, we will focus our comments on the Carbon Pollution Reduction Scheme. Notwithstanding the government’s response to the current economic downturn, the CPRS is the single most important public policy issue facing Bluescope Steel. That is because the scheme, as it is currently designed, has the potential to fundamentally affect our global competitiveness, especially here in the Illawarra. We should make it clear that we do support the government’s policy objectives—that is, reducing greenhouse gas emissions whilst maintaining the competitiveness of Australian industry. While the government has stated its desire to show international leadership on climate change policy, such leadership must not come at the expense of Australian emissions-intensive trade-exposed industries, such as the iron and steel industry.

The major problem with the CPRS is that it does not adequately shield industries from the loss of trade competitiveness that will inevitably occur if Australia imposes a carbon cost ahead of other countries. Around 38 per cent of the world’s steel is now made in China, and it is a large exporter. The so-called BRICK countries together make up over half of the world’s steel production. While Australia is a competitive place to make steel, being one of the few countries with high-quality iron ore and metallurgical coal, it is a small producer in global standards. Australia produces about 0.6 per cent of global steel production. Accordingly, we are largely price takers in global and domestic markets. Until countries such as the BRICK countries impose comparable carbon costs on their steel industries, imposing a carbon cost on the steel industry in Australia will simply make Australian steel makers less competitive and open the door for imports.

Although the headline rate of assistance for integrated iron and steel makers in the white paper is 90 per cent free permits, the effective rate of assistance is considerably lower. In fact, it could be as low as 64 per cent as our total scope 1, 2 and 3 emissions are taken into account. This is because significant parts of our business will be excluded from assistance under the white paper proposals. At $25 a tonne of CO2 equivalent, the cost of the CPRS for scope 1 and 2 emissions in the first year alone is tens of millions of dollars, after taking into account the government’s proposed assistance. Adding scope 3 costs would see this increase even further.

Costs of this magnitude would be difficult enough to bear in good economic times. In the current downturn it would be disastrous. Some have suggested the shortfall in assistance is necessary in order to provide an abatement incentive to industry. Given energy has always been a significant part of our costs, I would argue that we have in the long term built in a large incentive to save energy. Certainly, Bluescope Steel’s blast furnaces are internationally competitive in their use of carbon as a chemical reductant. However, when the shortfall in EITE assistance significantly exceeds an industry’s technical ability to abate its emissions, rather than acting as an incentive the CPRS simply becomes a deadweight burden.

Bluescope Steel is considering to research in Australia and overseas. Any low emissions technology breakthrough for the iron and steel industry, however, is likely to be decades away. The major opportunity we have in the short to medium term to reduce our indirect, scope 2, emissions is to improve our energy efficiency. The largest of these opportunities is to construct a cogeneration plant at Port Kembla steelworks which would use waste process gas to produce electricity. This $1 billion plus project would result in the net offset in emissions of over 800,000 tonnes of carbon dioxide equivalent per annum. It is one of the largest greenhouse gas reduction projects in Australia.

We believe policy needs to provide an incentive for the abatement expenditure, not to act as a deadweight burden on the industry. One of the flaws in the CPRS is that it will drain cash from the balance sheet that could otherwise be used in abatement projects. In our view, the cogeneration plant is exactly the sort of major abatement project which would also act as a stimulus to local employment and demand that the government could provide incentives to encourage. We cannot invest in this cogeneration plant unless we are sure the Carbon Pollution Reduction Scheme will not make our operations unviable. Accordingly, we need an emissions trading scheme that is affordable and sustainable; imposes costs on Australian emissions incentives trade exposed industries in tandem but not ahead of competitors; recognises the technological constraints on emissions abatement and steel making; provides incentives for investment in abatement; takes account of the current global economic crisis; and minimises the risks to competitive trade exposed Australian manufacturing industry investment and jobs. To achieve these objectives, the CPRS needs a significant amendment at a minimum. If that is not possible then government should examine an alternative policy framework.

In conclusion, we are very concerned that the CPRS will not meet the government’s own stated policy objective—that is, addressing the competitiveness of the energy intensive trade exposed industries and preventing carbon leakage. There is a real danger that an aggressive CPRS, particularly one that results in Australia acting ahead of major competitors, could compound current financial difficulties and affect the ongoing viability of the Australian iron and steel industry.

I thank you for the opportunity to appear before today. We are very happy to answer questions.

CHAIR —Thank you. I note that you read from a prepared statement. Does one of your advisers have the capacity to table a copy of that statement?

Mr Cornish —We will organise a copy for the committee.

CHAIR —Thank you. What is the current situation in terms of jobs? Have there been any job losses at BlueScope steel as a result of the global financial crisis?

Mr Cornish —Certainly. If I can put it in context, over many years we have worked very hard to be an efficient, productive and successful steel industry. That does mean that when we come to a crisis like this we are not playing catch up from years of management neglect. We have been very efficient, we are highly productive and we are an internationally competitive industry. However, this global crisis has been extremely severe in steel, as it has been in other parts of the world and other industries in Australia. As a result, we have had a circumstance where several hundred contractors have been removed from their daily activities at the steelwork in their role of supporting the steelwork’s operations. We have had many areas of our plant shut down for long periods of time over Christmas and in the Easter period, with employees using up all their annual leave and making inroads into their long service leave. We have had some small amount of retrenchments at this stage, but the aim is to try and effectively hold on to as many employees as possible. But the bottom line is that it is a pretty tough environment; the sense is that it looks like it might be getting tougher.

CHAIR —How many people do you employ directly and how many people indirectly benefit from BlueScope steel?

Mr Cornish —Currently in the Illawarra we employ 4,700 people. A study that was undertaken in 2006 by an independent research organisation showed that our multiplier effect of indirect jobs is somewhere between 12,000 and 16,000 additional jobs in the Illawarra. Whilst Wollongong is not a steel town as it was in the 60s, 70s and 80s—the economic base of the Illawarra has diversified with health and education—the steel industry is still a very large industry that contributes to employment generation in the Illawarra.

CHAIR —So over the last six to 12 months, how many of those people’s jobs have been under pressure?

Mr Cornish —With the global financial crisis under way, we are all feeling the pressure in what that might result in. As I said, we are doing our best to find ways with contract positions being moved out, although those several hundred contractors have a big impact on the local economy through the indirect employment affect, and we have many people on leave while we try to hold on to the workforce as long as we can.

CHAIR —But you do not essentially have any spare capacity to take the impact of any additional burden that might come?

Mr Cornish —Correct. These are very, very difficult times for most businesses in Australia today. The international market, of which we are a large exporter, is very, very weak, prices are at very low levels and domestic demand is very soft. So we are basically working really hard in order to make sure we get through this crisis. I do not believe that we have any capacity from next year to take on a tax that would not apply to all our competitors in the global marketplace—that is, the people who import into Australia and the people that we compete against when we export our product out Port Kembla. The tax would be of such a nature that I am not aware of any other steel maker in the world that is going to bear this carbon tax. Even the Europeans, who are in phase 2 of their emissions trading carbon reduction activities, are not talking about imposing taxes on their steel industry until at least 2012.

CHAIR —You say that it is the single biggest issue facing you and an even bigger issue than the global financial crisis. Have you done any work to assess, model or forecast the impact on your business? Because as a significant organisation you would be managing for every scenario, you would have a risk management framework in place and you would be planning for certain scenarios of where the government is proceeding.

Mr Cornish —We have modelled our business using $25 a tonne, which is the Treasury assumed modelling—

CHAIR —Which is a very generous assumption.

Mr Cornish —Yes. It is somewhere between that and $40, maybe. I do not want to give a specific number, but it is tens and tens of millions of dollars of impact from the first year of operation. Of course, it increases at 1.3 per cent per annum.

CHAIR —But what would that mean in terms of jobs?

Mr Cornish —What it means is that if our business becomes unviable in the global marketplace, then the whole Port Kembla steelworks is threatened.

CHAIR —So that is 4,500 jobs plus 16,000 jobs?

Mr Cornish —Yes. There is this transition issue that until the rest of the world’s steel industry, particularly those BRIC countries, bear the burden of a carbon tax, then it is very difficult to invest in the business when you are not cost competitive in the world. Also, if you cannot invest, it makes it harder to protect the jobs that are in the business.

CHAIR —If I were to sum up your opening statement, what you are saying is that you support efforts to reduce global carbon emissions but let us do it sensibly, let us do it in tandem with the rest of the world and let us do it in a way that is not going to put jobs at risk unnecessarily.

Mr Cornish —Correct. That is a very good summary, senator. The other thing I could mention to put a perspective on it is that the iron and steel industry in the world uses blast furnace technology to make steel and iron. The technology is the most efficient and commercial way to manufacture iron. The iron, in the process, requires carbon as a reductant. So we do not use carbon as an energy; we use it as a reductant to reduce the iron oxide to iron. So 80 per cent of the carbon used in the process is a technical limit set by chemical Stoichiometry equations.

We are very concerned that if tax is imposed at 10 per cent—and I mentioned earlier that that is probably a larger amount than that in business, when you take into account the 2 and 3 emissions—our ability to reduce our carbon gases in the steelworks is limited because of the technical requirements of the process. You get to the stage where it does not become an incentive to abate. We are very happy to stand up and take our share of the abatement effort where we can abate, but, once you get to the stage where you cannot abate any more, it just becomes a dead tax that just sits heavily on you and you cannot do anything about it.

As I think I said in the opening remarks, the technical breakthrough for a different process that does not have 80 per cent of the emissions caught up in the process itself is decades away, in our view. So we need to be very careful that we do not unfairly penalise the Australian industry, with the best of intentions that we have to support reducing greenhouse gases but with no ability to take it any further. That is where I come back to the cogeneration plant. It will have a big impact on the area where we can have an effect on our emissions, but, beyond that, to keep ratcheting it down it just becomes a tax that we cannot do anything about.

CHAIR —If you were no longer competitive, to the point where you were no longer able to produce steel here in the Illawarra region, who would take up the slack?

Mr Cornish —It would be made in some country overseas, like China or Indonesia—

CHAIR —What would that mean for emissions?

Mr Cornish —This is the whole issue, of course. The greenhouse gas issue is a global problem and it requires a global solution.

CHAIR —But the specific question is: if the industry and the jobs were exported from here to China, what would be the impact on global emissions?

Mr Cornish —My view would be that global emissions would probably increase, because the Port Kembla Steelworks is a very efficient producer of iron and steel. It is probable that it would be made through a process which is not as efficient as we are—

CHAIR —And not as environmentally efficient?

Mr Cornish —Correct. So we would see the loss of manufacturing industry and the loss of jobs in Australia for no global greenhouse gas improvement.

Mr Thomas —When you look at the whole world, Australia is a pretty good place to make iron and steel, if the objective is to minimise CO2 emissions. In this country we have very high-quality iron ore and in the Illawarra we have some of the best coking coal in the world. The combination of those two make this one of the top half-dozen places in the world to produce steel. If we do not make it here, and if we transport those raw materials to other places—and many of the other places that we do compete against do not have their own indigenous raw materials—then the net effect is a lot of emissions from transport. Steel will still be needed in this country.

CHAIR —And presumably the method of production would not be as efficient.

Mr Thomas —Certainly there is a mixture. There are some places in the world that are very good at making steel, with very low emissions, but equally there are many places, particularly in India and some of the plants in China, that have much higher emissions intensity than we do.

CHAIR —You mentioned towards the end of your opening statement that there is a need for significant amendments and if those amendments are not possible then essentially there needs to be a different policy framework. Can you talk us through the amendments that you are looking for and what, in your view, a different policy framework that would achieve the objective of reducing emissions by maintaining competitiveness would look like?

Mr Thomas —I will start and then Noel will pick up on anything I miss. Part of it is to do with timing. The timing of an imposition on our business needs to be coincident with the imposition of similar taxes on our major competitors. We need a scheme that incentivises abatement activities—the sort of thing that Mr Cornish talked about with the cogeneration plant. At the moment, the current proposal is a disincentive to making investments of that nature, because they are investments in extremely long-lived assets and it is very, very capital intensive. So you need an incentive. We need a scheme that recognises that there are technological limits, scientific limits, to how far you can reduce, and anything beyond that point is really just a tax burden. Incentive to support research and development in the area is a good place to go.

With regard to the second part, it is quite some time since we looked at this but we were involved in the early consultation as to whether you put in place carbon tax type schemes, border adjustment type schemes or ETS type schemes. We broadly agreed with the conclusion that the emissions trading type schemes seemed to be the most efficient way of ensuring that the emissions reductions go to the place where it is most economic to do it. Just changing to, say, a carbon tax will, unless those earlier principles are met and you make sure that you do not impose unreasonable costs on your energy intensive trade exposed industries, give exactly the same result at the CPRS. We do not believe that border adjustment type schemes are appropriate for our industry, and that really goes to the complexity. It would be extraordinarily complex. Just imagine the hundreds of thousands of different products that contain at least some steel and how complex it might get to try to perform some sort of border adjustment.

So, in summary, we think that the ETS approach is probably the right approach. The difficulty we have with the CPRS is really about the way in which it is proposed to be introduced, the timing of introduction and the fact that, as Noel said, in July 2010, we will be the only steel industry on earth that we are aware of that will have those sorts of imposts.

CHAIR —So the design is not right yet, the timing is an issue and we should be working in tandem with the rest of the world?

Mr Thomas —Indeed. It needs to be a global scheme. It is very, very difficult for one country to go it alone, particularly when we make 0.6 per cent of the world’s steel.

CHAIR —Are you having these discussions with the government directly as a business?

Mr Thomas —Yes. We have actually done that as the Australian steel industry.

CHAIR —So through an industry association?

Mr Thomas —Yes. But there are only two players—BlueScope and OneSteel—and we have joined together. I have to say that we have had excellent access and I believe the people developing the scheme do understand our issues.

CHAIR —They may understand but have they given you any comfort that they will address the issues that you have raised?

Mr Thomas —The challenge they have is to try to design a one-size-fits-all scheme in a very, very short period of time.

CHAIR —So they are trying to rush it?

Mr Thomas —Yes. if you draw comparisons with what the Europeans did. Quite some years ago they set about introducing a scheme and they still have not got to that stage and they are still giving 100 per cent credits for direct emissions to their steel industry so that they can progress.

CHAIR —They provided more permanents than there were emissions in—

Mr Thomas —They did. They certainly made some mistakes.

CHAIR —It is an easy way of introducing an emissions trading scheme if you do it that way, is it not?

Mr Thomas —Yes. But my point is that they have taken a long time to do it because it is extremely complex and it is very easy to get outcomes that you did not expect or certainly did not want.

CHAIR —What I am hearing you say is that the government is rushing. I guess the question then is: is it not even more important in the economic circumstances we find ourselves in to take our time to get the design right and to get the transition period right?

Mr Thomas —Absolutely; it is essential that we get this right. We as an industry and we as a company are not shying away from our responsibility and the fact that we need to contribute to a reduction in emissions. However, we believe the current scheme is going to lead to outcomes that do not reduce global greenhouse gas emissions and certainly it is not going to help the Australian economy or the people of the Illawarra.

CHAIR —I suspect your access has been as good as it has been because you have had a local member of parliament take you along to the government, have you?

Mr Cornish —Yes, we have supportive local members.

CHAIR —That is very good. Your local member has been on public record discussing some of these issues.

Senator HUTCHINS —This cogeneration plant: it is not operating yet?

Mr Cornish —It is in the design phase, Senator, and I would estimate that already well over $50 million has been spent in the design phase of this cogeneration plant. It is a large plant, over $1 billion expenditure, but it is still going through the preparation for submission phase.

Senator HUTCHINS —If the scheme, as proposed, proceeds, has there been any discussion at board level about what might be the next step by BlueScope?

Mr Cornish —With respect to this project?

Senator HUTCHINS —Yes.

Mr Cornish —The issue at board level is that this project is of grave concern in an environment where we believe we are going to have our competitiveness affected by the CPRS. I should mention that in our briefings to government and to the public service supporting this scheme we have been very fulsome in our description about this opportunity with cogeneration.

Senator HUTCHINS —In light of your comments about export exposed industries and also the global financial crisis, to be blunt: has there been any discussion at board level about what might be the board’s, and therefore the shareholders’, view about the future of BlueScope at Port Kembla if this scheme comes in on July 2010?

Mr Cornish —I really cannot speak on behalf of the board, and nor should I try. I am expressing a view that says that we are very concerned about the steelworks being uncompetitive if it gets a tax imposed on it that none of our competitors in the world have to bear. Our ability to be able to sell our product profitably in Australia, when we have imports coming in from producers that do not have a carbon tax, will be made more difficult and our ability to sell our steel overseas—half the production of the Port Kembla steelworks is exported—bearing a tax that none of our competitors have, particularly in this global financial crisis where margins are nonexistent, will also be more difficult. But even in the good economic times, margins are not that large in the steel industry that you can bear substantial taxes on a business of this nature when no-one else has them.

Senator HUTCHINS —Have there been many exports this year from Port Kembla?

Mr Cornish —Normally we would export about 2,500,000 tonnes per annum from Port Kembla steelworks out of a total of 5.3 million tonnes per annum. That is usually about $1½ billion worth of exports out of New South Wales. It is quite substantial. We found that we were running at record rates of production and record rates of domestic demand and export up until October, when this global crisis hit. Because the markets have been so poor since October, we have substantially pulled back our production in order to try to match our production to a very thin market. So right now our production has pulled back substantially in reaction to the global financial crisis.

Senator HUTCHINS —So is there a figure you could give us that is not confidential? Is it 50 per cent?

Mr Cornish —How far production has pulled back? A round figure would be about 50 per cent. I should also mention, for the sake of completeness, that we have a furnace that is under reline at the moment. We have two blast furnaces in Port Kembla. One is being relined at the moment, so it is out for operational reasons, but I should say that if the furnace was not being relined at the moment, it would be shut down for market reasons. When the furnace is due back from reline, which is mid-June, the big question will be: are the markets there to enable the furnace to start up again?

CHAIR —You mentioned in your opening statement that 90 per cent free permits, which is sort of the headline figure that is being quoted out there, is in effect much less. I think you mentioned something around 63 per cent or 64 per cent.

Mr Cornish —Yes.

CHAIR —Can you explain how that works because we went over it quickly before.

Mr Thomas —We have done a lot of internal modelling, as you can imagine, to try to understand the impact of this. The first point is that the 90 per cent headline number does not apply to the whole iron and steel industry. The federal government modelling that was done assumed that it did, but it actually only applies to the really intensive steelmaking operation, where you are dealing with red-hot liquids and red-hot materials. All of the downstream processes, which is a very substantial operation—where steel is rolled and shaped and galvanised and painted and formed and turned into marketable products—will receive no assistance. So when you take into account those emissions, plus the emissions from the really intensive part, that dilutes the amount of compensation. The other point, which is more uncertain, but in our industry we think potentially very substantial, is the scope 3 emissions. These are the emissions that are passed on to us by other people that we buy goods and services from. The one that probably concerns us the most is coal. The Illawarra mines are quite gassy. While they technically do meet the definition for EITE, they are not going to classified that way.

CHAIR —None of the coal is classified?

Mr Thomas —Correct. So those costs, the permits that they have to buy—

CHAIR —Will be passed on to you.

Mr Thomas —Certainly. We have made estimates of that pass-through cost. It is the same for other materials that we buy. You add those together and we think that the average will range somewhere between 64 per cent, as a worst-case scenario, in the first year through to the low 80 per cent mark. Then, of course, every year after 2010 that will decrease; we will get less compensation, or more tax.

CHAIR —So the government assumes you are getting 90 per cent free permits in the economic modelling.

Mr Thomas —The modellers made that assumption. That was made public.

CHAIR —So that is the Treasury modelling that was released in Australia’s low pollution future.

Mr Thomas —Correct.

CHAIR —But if the assumption is that you get 90 per cent when in effect you are getting 64 per cent, that is another reason as to why the outcome that comes out at the other end is then an underestimate of what would actually happen. Is that a fair statement?

Mr Cornish —That is the point we are making.

Mr Thomas —Yes. There were also some other assumptions in that modelling that we questioned. There was an assumption about when our competitors might introduce similar schemes. From recollection, it assumed that China would adopt a similar scheme by 2015 and India by 2020. Personally, I think that is a fairly heroic assumption.

CHAIR —Do you have a document that is reviewing the Treasury modelling from your point of view that you might be able to share with us?

Mr Thomas —No, we do not have access to the details of that modelling. All we have seen are some of the assumptions.

CHAIR —They have released part of it and they are trying to cover up another part, which this committee is chasing. But in as much as you have been able to review the part that is published, have you got a critique of it that you might be able to share with the committee?

Mr Cornish —We certainly have had internal work done, but whether we would be prepared to make it public is something I would like to take on notice.

CHAIR —That is fine, but bear in mind in your considerations that you are able to give it to the committee on a confidential basis, which means that we will not publish the information but will use it to draw conclusions.

Mr Cornish —Thank you.

CHAIR —You are aware that Frontier Economics did some work for the New South Wales government in assessing economic impacts; were you consulted as part of that process, or were you asked to provide input?

Mr Cornish —No. We did not provide any input. In fact, the first that we really knew about it was when we read it in the newspaper.

CHAIR —The conclusions that were drawn are that regional economies will be particularly hard hit, and that economies in regions like the Illawarra and others around Australia would contract by between 20 per cent and 25 per cent. That is also your view, isn’t it?

Mr Thomas —That is certainly consistent with our view.

CHAIR —If the economy in the Illawarra region were to contract by 20 per cent, what would that mean in terms of the number of jobs?

Mr Cornish —I do not know whether we can answer that.

Mr Thomas —It is a hypothetical question. The scenario for us is a world in which we have this ever-increasing tax imposed every year, draining cash out of the business and destroying the balance sheet. There is no investment—

CHAIR —You have already said that all jobs would be at risk if you were to become uncompetitive as a result.

Mr Thomas —I worked at the Newcastle Steelworks some years ago and I saw what can happen to steelworks when over a period of years you are unable to invest in modern technology and still have to compete in a globally competitive market. I think the outcome is inevitable. It is an extremely competitive industry and it is a very open industry. We compete against all-comers right across the world.

CHAIR —Thank you very much for your contributions to the committee today.

Mr Cornish —Thank you very much for the opportunity to present to you.

Proceedings suspended from 4.01 pm to 4.11 pm