Introduction
Referral and conduct of the inquiry
1.1
On 26 November 2015, the Senate referred the following matters to the
Senate Economics References Committee (the committee) for inquiry and report by
the last sitting day in June 2016 (30 June 2016):
- the future sustainability of Australia's strategically vital steel
industry and its supply chain; and
-
any other related matters.[1]
1.2
Details of the inquiry were placed on the committee's website. The
committee also wrote to individuals and organisations, inviting submissions by
15 February 2016.
1.3
The committee held three public hearings and performed two site visits.
On 1 April 2016, the committee conducted a site visit of BlueScope
steelworks and then held a committee hearing in Wollongong, New South Wales. On
5 April 2016, the committee conducted a site visit of the Arrium steelworks and
subsequently held a public hearing in Whyalla, South Australia. The third
hearing was held on 6 April 2016 at Parliament House, Canberra. A list of
witnesses who appeared at the hearings is at Appendix 3.
1.4
On the dissolution of the Senate and the House of Representatives on
9 May 2016 for a general election on 2 July 2016, the parliamentary
committees of the 44th Parliament ceased to exist. At that time, the
committee's inquiry lapsed.
1.5
On 11 October 2016, the Senate agreed to the committee's recommendation
that the inquiry be re-referred in the 45th Parliament and for a
final report to be presented by 1 December 2017.[2]
1.6
The committee resolved to re-open submissions with a closing date of
17 February 2017. This was notified on the committee's website and
additional direct invitations were issued to stakeholders.
1.7
At the time of tabling this interim report, the committee has received 39 submissions
to the inquiry. A list of the submissions received by the committee is provided
at Appendix 1. Other documents authorised for publication by the committee are
listed at Appendix 2.
Interim Report
1.8
The committee has decided to table this interim report primarily focused
on the issues affecting Arrium, drawing on evidence provided by submitters and
witnesses from the Whyalla region. The committee will table a final report by
1 December 2017 which will cover in depth the broader issues canvassed in
this inquiry.
1.9
The interim report is structured as follows:
-
chapter 1—provides background information to the inquiry and
presents an overview of the steel industry in Australia and the current
challenges and pressures; and
-
chapter 2—outlines the current position of Arrium and its contribution
to Whyalla and sets out the committee's conclusions and recommendations.
Note on terminology
1.10
Arrium Limited is an international diversified mining and materials
company with three business segments: Arrium Mining Consumables, Arrium Mining
and Arrium Steel. Unless otherwise specified, references to 'Arrium' in this
report are in relation to the activities of Arrium Steel (Arrium).
Background to the steel industry in Australia
1.11
Significant steelmaking activities have occurred in Australia
since 1915.[3]
The modern Australian steel industry is comprised of a large number of
companies involved in different segments of the steel production and supply
chain. In addition to two companies producing crude steel in Australia, the
industry incorporates downstream steel products manufacturers, steel
distributors and steel recyclers.[4]
1.12
There are two integrated steel producers in Australia: Bluescope Steel,
with Australian production operations based primarily in the Illawarra region,
New South Wales; and Arrium (formerly OneSteel), with production facilities in
Whyalla, South Australia.
1.13
Both of these steelworks are connected to downstream steel fabrication
and distribution networks Australia wide. In 2015, total Australian crude steel
output of 4.9 million tonnes (Mt) represented about 0.3 per cent of world
output. The Department of Industry, Innovation and Science (the department) submitted
the following summary of the two producers in Australia:
Table 1: Summary of Australia
Producers[5]
1.14
Further to this, the department submitted:
The volume of Australian crude steel production has fallen in
recent years. World Steel Association time series data starting from 1980
indicates that Australian crude steel output was 7.6 Mt in 1980 reaching a peak
of 8.9 Mt in 1998; Australian steelworks were still producing 7.3 Mt in 2010.[6]
1.15
Arrium Ltd developed from the demerged long products segment of BHP
Steel, a wholly owned subsidiary of BHP Ltd, in 2000 and listed on the
Australian Stock Exchange (ASX) originally as OneSteel. Arrium stated in its
submission:
Arrium generates approximately 14,000 jobs through its
activities, employs nearly 7,000 people directly, and spends nearly $4b in
goods, services and taxes each year. We produce approximately 44 per cent of
the total amount of crude steel made in Australia each year, with a total
steelmaking capacity of 2.6 million tonnes per annum (MTPA).[7]
1.16
BlueScope, formerly BHP Steel, de-merged from BHP Billiton in 2002 to
form a stand-alone public company. The steelworks now operated by BlueScope in
Port Kembla were first opened in 1928.[8]
BlueScope stated in its submission that it employs approximately 7,500 workers
in total in its Australian operations, as well as a further 8,500 employees
overseas.[9]
According to its website, BlueScope employs around 3,000 directly in the
Illawarra and supports about 10,000 jobs in the Illawarra - including
contractors, suppliers and other service providers who are dependent on the
Port Kembla Steelworks.[10]
Steel manufacturers and
distributors
1.17
The steel supply chain in Australia also incorporates a large number of
diverse small and medium-sized enterprises. This includes over 200 steel
distribution outlets across Australia, as well as other businesses including
steel fabrication and advanced engineering firms. As of June 2014, a total
of 12,253 businesses were registered as operating in the Australian steel
industry supply chain.[11]
Contribution of the steel industry
1.18
The steel industry makes a significant contribution to the Australian
economy. Submitters referred to ABS data showing that in 2013-14, the entire
steel industry supply chain employed over 100,000 people in Australia, with an
annual turnover in excess of $35 billion.[12]
Within this supply chain, the upstream steel industry (iron smelting and steel
manufacturing) employed about 18,500 people, paid annual wages of $1.5 billion
and had an annual sales and service income of about $11.1 billion.[13]
1.19
According to the World Steel Association, Australia produced 4.9 million
tonnes of crude steel in 2015 and 4.6 million tonnes in 2014. This production
ranked Australia as 29th and 30th respectively out of the
top 50 crude steel producing countries. The top three producers in 2015 were
China (803.8 million tonnes), Japan (105.2 million tonnes) and India (89.4
million tonnes).[14]
Challenges and pressures affecting the steel industry
1.20
Evidence to the inquiry highlighted the challenges and pressures
affecting the Australian steel industry which are briefly summarised below.
Further details and analysis of these challenges will be provided in the
committee's final report.
1.21
Australia is a relatively small contributor to global steel output. Furthermore,
Australian steel imports as well as exports have declined in recent years. Data
provided by the department indicated that in the 2014-15 financial year,
approximately 0.83 million tonnes of steel product was exported from Australia,
while approximately 1.6 million tonnes of steel product was imported. This
compares to the export of approximately 2.6 million tonnes and import of 2.3
million tonnes of steel in the 2006-07 financial year.[15]
1.22
The Australian experience mirrors the international situation. Since the
onset of the Global Financial Crisis, excess global steel production has led to
an oversupply in the international market.[16]
In addition, there has also been falling investment in 'downstream' industries
that use iron and steel manufacturing products.[17]
1.23
On this issue, Arrium submitted:
In recent times...the significant global oversupply has
resulted in an increasing amount of marginally costed/priced imported steel
being used in Australian projects. In turn, these low-priced imports have
pushed Australian prices to unsustainable lows.[18]
1.24
Evidence to the inquiry highlighted concerns about the ongoing
competitiveness of Australian steel producers and manufacturers.[19]
1.25
The department submitted that productivity costs, in particular the
relatively high contribution of labour and overhead costs to total production
costs have also been a challenge for the industry.[20]
Sustainability of the Australian
steel industry
1.26
The committee notes that domestic conditions and international market
pressures are impacting the steel industry and that these challenges are
expected to continue. Submitters and witnesses expressed concern that, should
the current situation continue unabated, the steel industry will cease to operate
in Australia.[21]
1.27
The Australian Manufacturing Workers' Union argued that maintaining the
domestic industry is important to ensure a supply of steel during times of
international conflict.[22]
Other submitters noted that maintaining a domestic steel industry is important
both for the economic performance of other industries in the supply chain[23]
and the overall economy.[24]
1.28
A majority of submitters and witnesses advocated for a higher level of
government support and intervention to ensure the sustainability of the
domestic steel industry. The committee received evidence suggesting a range of
assistance options including:
-
direct financial assistance and support;[25]
-
changes to procurement rules and processes to provide:
-
a preference for domestic labour;[26]
-
a requirement to assess whole of life costs (not only up-front
costs);[27]
-
mandating local content procurement targets;[28]
and
-
further review and amendment of anti-dumping regulations. Whilst
some submitters were broadly supportive of the changes implemented in November
2015,[29]
several submitters and witnesses argued that the current anti-dumping regime is
inadequate and that further work was required to provide adequate safeguards
for the domestic industry.[30]
Context of the interim report
1.29
The committee notes the ongoing uncertainty affecting the Australian
steel industry, in particular the operations of Arrium.
1.30
Arrium was placed into voluntary administration on 7 April 2016. On
12 April 2016, KordaMentha were appointed as voluntary administrators of
Arrium Ltd and its 93 subsidiaries.[31]
1.31
On 5 October 2016, KordaMentha advised that the sale process for Arrium
is continuing: non-binding indicative offers are due in October 2016 and
shortlisted bidders are expected to submit final bidding offers during December
2016.[32]
1.32
On 4 November 2016, following a vote in favour by the majority of
creditors, the voluntary administrators (Mark Mentha, Martin Madden, Cassandra
Mathews and Bryan Webster) were appointed as Deed Administrators of the Arrium
Group Companies. The Arrium Group Companies will continue to operate on a
business as usual basis, and the Deed Administrators will continue to progress
the sale and recapitalisation process.[33]
1.33
The committee notes the recent sale of the mining consumables segment of
Arrium (Moly-Cop). In accordance with the terms of reference, the interim
report focuses on Arrium in the context of its steel business.[34]
1.34
Further details about Arrium's position and activities undertaken since
being placed into voluntary administration are provided in chapter 2.
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