As prices tumble and job cuts mount, the turmoil which has engulfed the steel industry in Australia is plain for all to see.
By and large, the sector is undergoing a period of what can only be described as sheer turmoil. More than 3,000 jobs, including 1,150 full time employment positions and 450 contractor provisions within the steel division specifically, are under threat at Arrium’s operations in Whyalla in South Australia. Last month, the company put its steel making plant there into ‘care and maintenance’ mode.
Overall volumes of steel produced have fallen from 7.3 million tonnes in 2010 to 4.9 million in 2015 according to the World Steel Association (worldsteel). This puts Australia at 29th position and gives the country an implied world market share of just 0.3 per cent. Though it expects to turn a profit this year, BlueScope over the past four years has delivered an unbroken string of financial losses.
Going forward, commentators are not optimistic. Having dropped by an expected amount of more than 30 per cent over the five years to $10.8 billion in 2015/16, revenue in the iron smelting and steel manufacturing sector will drop by a further 11 per cent over the next five years to just $9.6 billion, industry research firm IBIS World reckons. Last year, Credit Suisse analyst Michael Slifirski told clients in a research note that domestic steel manufacturing in Australia ‘does not appear to have a future.’
Largely, this is being driven by overproduction in China, which produces around half of the world’s steel output and is believed to be heavily subsidising unprofitable production. Despite needing only 748 million tonnes for its own domestic use, the Middle Kingdom pumped out 854 million tonnes in 2014, dumping the rest on world markets and depressing prices. Current worldsteel data suggests it unloaded a further net of 50 million tonnes of excess stock last year.
Accordingly, at $US475 per tonne, the MEPS All Carbon Steel Products Composite Price last November was sitting at just over half its level as recently as four years ago. Overcapacity in China alone equates to around 200 million to 300 million tonnes, BlueScope says.
The upshot for Australia, according to Australian Steel Institute CEO Tony Dixon, revolves around a combination of underutilised capacity and a sharp contraction in margins.
“You have underutilised businesses suffering profitability strain,” he said. “That’s steel companies, distribution, fabrication, right through the value chain. They are all underutilised and under strain.”
Many in the construction sector are worried. In its submission to the aforementioned inquiry, the Australian Constructors Association argued that local steel manufacturers had a strong record of compliance with Australian building standards and that having the option to source locally as well as internationally enhances competition and diversity in the marketplace and delivers significant benefits in terms of lead times and prompt delivery of products for projects.
In another submission regarding the same inquiry, former builder and now crane driver Ryan Scott was less polite.
“As soon as you turn that blast furnace off, the prices will start to rise on imports and then we will have lost our last steel works and a **** ton of jobs,” Scott said, adding that he had found that welding Australian steel to Chinese generally did not work because of the quality difference.
“You've let the car industry die, don't let our next major industry die.”
Furthermore, should the industry not have a viable future, many commentators fear being inundated with poor quality products from China and elsewhere. In a 2013 survey of a wide range of building products conducted by Australian Industry Group, almost half of all respondents from the steel industry put the level of penetration of non-conforming product at between 11 per cent and 50 per cent.
Andrew Fowler, managing director of New South Wales based frames and trusses and modular construction provider Austruss, said common problems associated with Chinese steel include weld failures, insufficient iron content or excessive carbon content in the steel itself. There are also products with the wrong silica content, leading to the coating not sticking properly to the steel during galvanisation and thus allowing premature corrosion and rust. A common form of complaint, he added, revolved around substitution of product and delivery of steel which was different to that specified in mill certificates.
Dixon says the industry would like to see all products on Commonwealth funded projects being required to meet the Australian standard and for this to be guaranteed through third party certification of both the steel itself the fabrication of the steel. As well as ensuring that local producers were not being disadvantaged by being forced to produce goods to standard and subsequently compete with imports which did not meet standard, he says this would help to guarantee the safety of end users of public buildings and infrastructure.
Second, whilst stressing that he was not advocating for any form of protection, he would like procurement decisions on public projects to take into account a holistic view of the full economic, environmental and safety benefits associated with the purchase of local product along with the cost which local producers incur in terms of meeting their requirements regarding social, environmental and occupational health and safety obligations. Whilst it was valid to guard against protectionism at a local level, Dixon says it must be remembered that much of the product local producers are competing against from China is heavily subsidised.
Others would go further. One group of 63 businesses including mainly building products suppliers wants the federal government to mandate 100 per cent use of Australian steel on all Commonwealth funded projects where possible, as well as for Australia to refuse to sign on to the government procurement section of the Free Trade Agreement with China and to back out of its intention to accede to the World Trade Organisation Agreement on Government Procurement.
As well as beefed up action on steel dumping, meanwhile, the Australian Workers Union wants 80 to 90 per cent use of local steel on public projects as well as the urgent investigation into the idea of direct co-investment in ‘discrete cases’ including the Whyalla steelworks and concessional funding to allow the retooling of the steel industry.
Construction industry advisor David Chandler OAM, meanwhile suggests a different approach. First, Chandler would like to see Australia adopt European standards for steel. Second, whilst he says the local steel industry as it currently stands will not survive in its entirety, he feels the light steel and roll formed grades have potential. Finally, he would like to see a bigger picture shift within the broader construction sector involving greater levels of standardisation in design and a greater willingness on the part of suppliers across the various building product segments to see their products not as an exclusive solution in and of themselves but rather as each material being a part in the supply chain which together makes up the building.
Indeed, whilst many commentators focus upon difficult market conditions, Chandler instead attributes current problems to the industry’s own management and what he says is a failure on the part of local producers to innovate and develop a strong value proposition.
“The Australian steel industry is a product largely of its own making,” he said. “(This includes) lazy management, unproductive unions at the manufacture sites and disruptive unions at the sites of installation.”
Fowler, meanwhile, says it is crucial for Australia to have its own domestic supply.
“I think it’s a sovereign risk for this country not to produce steel,” he said. “Who knows who we are going to be up against in the future as far as a potential threat to this country – whether it be China or whether it be Indonesia or anyone?
“If we are buying our steel from China to build ships or tanks from this country, who says that there is no sovereign risk there that we are not doing it correctly in this country to separate ourselves from those people?”
The steel industry in Australia is facing difficult times.
From the viewpoint of the 90,000 odd people ASI says work in the sector as well as its many other stakeholders, the hope is that the industry does indeed have a viable future going forward.