Spiralling cost in energy intensive categories such as steel, bricks and cement are placing building product manufacturers under enormous pressure to justify ongoing investment in Australia, a leading construction sector economist says.
At a recent summit hosted by Housing Industry Association, HIA Principal Economist Tim Reardon said sentiments were expressed that manufacturers were under growing pressure to justify investment in Australia amid rising in energy costs.
Without identifying individual companies, Reardon indicated that several large manufacturers presented the summit with retail energy bills which had doubled over the past three years.
One presented a bill showing a 108 percent increase in energy costs over that time.
Another showed a 91 percent rise.
“It’s certainly a big problem and every manufacturer consistently raised it as their number one concern,” Reardon said.
“Each of them presented their information in a different way all of which said that they are competing within their own businesses to attract manufacturing investment into Australia.”
“When they do, their global headquarters do their benchmarking to work out where the best place is going to be to locate their manufacturing facilities. Australia does not compare well when it comes to energy prices and the forecast for energy prices hurts that even further.”
According to Reardon, the effect will flow through to builders in rising costs for materials.
Many will look offshore for their supply – with further costs associated with importation and uncertainties surrounding exchange rates.
He said the biggest impact was likely to be felt in civil construction.
As energy prices have risen, building product manufacturers have taken desperate measures to contain costs.
Some are even investing in their own generation capacity.
New owner of Arrium Steel Sanjeev Gupta, for example, has indicated that Arrium will generate its own power at its own sites where possible.
Reardon says the need to do this will make investment in Australia even less appealing.
He said manufacturers in areas such as cement were facing rising costs for raw materials.
He says the importance of cost competitiveness should not be underestimated.
“You only have to look at the history of automotive manufacturing over the past ten years to see that when the cost base increases, their parent companies are forced to decide where they are going to locate manufacturing,” Reardon said.
“If you are not cost competitive, then their long-term investment decisions are to invest in places of the world that are.”