Oh for a bit of that “war on business” that Labor is charged with conducting.
Having already achieved the impressive record of the single largest piece of pork in this or probably any election campaign with its $100 million commitment to a new, entirely unviable, footy stadium in Townsville, Labor is seeking to secure its credentials as the kings of pork barrelling with another porcine Godzilla: today’s $100 million commitment to try to prop up unviable steel manufacturer Arrium. If Labor’s in a war on business, it’s firing money at the enemy.
The handout has been dressed up as a “Steel Reserve” that will “promote the long-term sustainability of Arrium’s steel business”, “secure Arrium’s operations across Australia, and particularly in Whyalla” and “assist the business in permanent cost reductions which do not cost jobs”. You can just see what’s left of Arrium management wandering around being shown cost reductions they missed because they were too busy sacking workers.
The South Australian Labor government will also be joining in the frolic, with $50 million from South Australian taxpayers.
[All bow to the great god of manufacturing, you hypocrites]
As Crikey has previously explained, Arrium, even if it emerges from administration and is managed much better than it has been, has no hope of ever being competitive in a world awash with cheap steel — much of it made by China with our iron ore. And you could impose all the local content quotas you like — mandating domestic consumption of Australian steel won’t defeat the basic economics that we can’t make steel cheaply enough. In fact, we already have a de facto local content quota via our inefficient anti-dumping system in which, like virtually every steel-producing country in the world (including China), we allege other countries are dumping steel on us at below-cost prices and slap a tariff on imports.
[Does the government have the steel to resist a protectionist push?]
In April, Bill Shorten announced a set of tortuously constructed measures to prop up Arrium, but he has now gone the full handout route, putting more pressure on the government to commit to more than just promising to toughen up anti-dumping processes (which, inconveniently, it has already “toughened up” once while in government).
Labor (and parties like NXT, which is even more protectionist) are treating voters like mugs. Yes, voters like protectionism and propping up traditional industries. But propping up the likes of Arrium — a victim of its own mismanagement as much as the Chinese steel industry — perpetuates the myth that there’s no cost to keeping such industries on life support and that lazy, incompetent business people, if they’re lucky enough to be in the right industry, can expect governments to save them from the consequences of their own decisions.
Manufacturing has lost hundreds of thousands of workers in recent decades and approximately halved its share of the Australian workforce in that time. A generation of manufacturing workers, in what were once five car manufacturers around the country, and textile workers, mainly women and disproportionately non-English-speaking, lost their jobs as we abandoned protectionism. They paid a price so that the economy could achieve the kind of long-term growth we’ve enjoyed for over two decades and a big rise in the wealth of all Australians. Despite being the party that accepted that economic trade-off, Labor now wants to help freeze manufacturing at its current level, because Australia should “make things”.
Is Arrium Steel worth saving because of the ‘economic multiplier effect’? Here’s fascinating historic precedent.
Bill Shorten is promising $100 million to Arrium if they put it into productive infrastructure on the basis of how steel from Arrium permeates not only the local providers, but a lot of Australian Industry.
By comparison, the Dutch East India Company flourished for about 200 years (1589-1790). It was enormously profitable for its first 100 years, spawning a wide range of technologies, industries and social organisations. However, it ran at a LOSS for its second century, with losses greater than the gains of the first century and employment still grew from 2,500 in 1700 to 36,000 in 1753!
You can read the brief, but fascinating account of it from one of my Danish innovation-theory colleagues, Bart Nooteboom, here:
“HOLLAND’S GOLDEN CLUSTER:
THE STORY OF THE UNITED EAST INDIA COMPANY”
http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.23.7982&rep=rep1&type=pdf
The steel talk is basically rubbish. Arrium has some world class technologies. However we import garbage steel from China, and it is dangerous garbage. My godson and his brother work in metal fabrication, they avoid Chinese steel. After world war 2 my father said they could not get decent steel posts for a decade. Imported garbage again. We made competitive products for years, but other countries have save wages, crap products and trade barriers. We sell our industries down the river. We used to make most things we needed. We made aircraft, tractors, we invented harvesters, now we do not make ONE. We could have had a world calss solar industry, industry refused and the government spent the money on coal.
“Arrium, even if it emerges from administration and is managed much better than it has been, has no hope of ever being competitive in a world awash with cheap steel”.
Shame, Bernard! This promotes the ‘cost’ over the ‘value’.
“Cheap steel”, not appropriately certified, should NEVER be permitted in Aus.. Cheap is rarely cost-effective.
Roger Seccombe, Professional Engineer
The world is also awash with cheap perfume but we know it’s infra dig to wear it.
Like cheap steel, cheap perfume doesn’t last as long.
Our transition to a services industry economy, extolled by Bernard, will not replace manufacturing to save the country. Services are merely ‘add ons’, a sort of quote of Adam Crighton on The Drum.
This a way out there as a comment goes but, if in some future years the world goes totally to pot. Australia has dismantled it’s manufacturing capacity relying on imports. Imagine if our government upsets a foreign power who decides to blockade Australia and has the muscle to implement it. Remember that Australia has limited manufacturing capacity, no steel mills, no auto industry, in fact bugger all. We are self sufficient for basic foods. How do we distribute it without vehicles, railways or sea transport? All of these needing steel etc. that we can no longer get or produce. How do we survive? Like I said before the flaming starts this is way out there but I’d still like someone to answer it.
Well, Barry, I’ll have a go at answering it. The first thing you’d want to do in assessing this ‘benefit’ from keeping Arrium going is to get some idea of the present value of having Arrium around post-apocalypse. Second, you’d then want to probability-weight this; straight away that makes it a pretty small number. Third, you then need to compare this very small number with the very large and certain current costs of handing our money over to Arrium management now. In the unlikely event that your expected benefit number exceeds your expected costs, you then need to ask why far-sighted private interests aren’t willing to make this attractive investment themselves: up-front costs now for big benefits postwar. If private investors don’t want a piece of that then it’s not clear that the taxpayer should. Indeed, the taxpayer is only being hit upon precisely because every private investor would rather put their money somewhere else. Finally, I think Bernard underplays the magnitude of the victory achieved by Hawke and Keating and others in dismantling industrial protectionism in Australia. In the US, the nylon-meshing industry once sought protection on the grounds that they would make mosquito netting for the brave troops in an Asian war in the future. If we cave to Arrium we’ll have a line of supplicants outside the door long enough to break even the coalition’s bank.
I’d also like to stress, before the flaming begins, that the ‘jobs purchased’ issue is separate (but still very misguided IMO) from this point, which is a response to Barry’s very reasonable question.
Thanks for the reply with no nastiness and reasoned points, makes a nice change. This isn’t just about Arrium but Australia as a whole, what happens if the apocalypse happens? and before I’m labelled a complete nutter (not for the first time) unless we have the capacity to manufacture we are up a well known creek without a paddle. As I said all hypothetical, then governments develop policies on hypotheticals.
I would rather see government money given to businesses such as these as equity injections rather than loans or grants. The corollary of that is any senior execs working from Arrium would get paid no more than a senior exec in the public sector, and board members receive only equivalent to advisory board fees for government bodies (as per Nassim Nicholas Taleb’s idea).
Further, I’m not sure that steel isn’t a good business to keep going in Australia even if it does mean just one manufacturer left here (with government as a part-owner). I can see a thousand scenarios where the world is teetering on the edge of the abyss, and although an accountant may quantify that as low risk, so did all the accountants before the GFC. Low Risk does not mean low exposure.
As per Roger Seccombe’s point, the world is awash with cheap steel but there a lot of projects where high quality steel is actually the cheaper option (what! higher cost is cheaper, how can that be! slaps forehead)
I’d be thinking maybe for a submarine, anyone know of any plans to build one? Perhaps I would be commissioning highest quality steel for all those wind turbines that I would line the coast of much of Australia with, built to last 100 or more years rather than rust buckets after 25. But that’s just me, tending to think of value being more than just a price proposition.
Isn’t the quality of metals highly variable dependent on the quality of manufacture, and although we can’t compete with China for cheap steel, is that also the case for quality steel? And aren’t we supposed to be producing the high-end/high-tech stuff that can’t be done in the high quantity countries, like China? Isn’t that exactly the place we are supposed to be?
Just asking, would love an engineers/scientists views on this.
On ABC RN this morning, someone (can’t remember who) )said that Arrium was in trouble because it made a number of investments in now unprofitable iron ore mines. Arrium apparently sells all or most of its steel in Australia and there is demand for its product. The Labor grant/loan would be made to new management/owners not the current lot.
If Arrium closes what happens to Whyalla and its residents? And are there any other steel producers in Australia? As other commenters have said, there are national security/viability reasons for having a local steel industry.
Methinks sometimes, Bernard, you show too much of the Canberra economist attitude.