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GOVERNMENT - and the collapse of the chemical industry in Australia

Government naiveté 

The key to our long term observations is that governments (we stress plural) have and continue to contribute to the underperformance (or should we say, collapse) of the industry. Yet, we see an important role for state and federal governments as the facilitators of change. The competitiveness of our country is determined by its ability to adapt to changing economic conditions - a capacity which is a public good for which the government should be be its guardian.

Up till now, (2002) governments in Australia have, in our opinion, been more distracting than constructive - overall misallocating resources and placing secular political interests, before long term competitive development. It has promoted a culture of looking to initiatives, "feel good" matters (see for example DISR).

While our criticism is aimed more at what it did not do (and there many opportunities where it could have acted in the public interest with public goods and services without considering subsidies and other forms of taxpayer subsidies), lets first look at some federal government initiatives.

Federal Government

Up until the mid 1970s it imposed a form of import tariffs (and other forms of assistance, including duties) on imported goods to inflate their local price enabling local industry to undertake activities both inefficiently and below competitive scale. This technical and economic inefficiency has led to the so-called collapse of the industry. (For example, Timbrol and CSR Chemicals were technically very efficient, Timbrol to 1954 exceptionally so, but economically inefficient - meaning a drain on public wealth). While this tax, called an import tariff, was justified to nurture new activities, it largely created fragmentation (with some super profits such as APC, later part of Kemcor to become Qenos returning over 100 per cent returns to shareholders funds in just one year (1983 with similar high returns in other years). 

Beginning with the Whitlam government, the winding back of tariffs was undertaken without any vision for its future.

More seriously, the federal government supported a deferred tariff reduction (actually an IAC review that would have resulted in a reduction) to enable ICI Australia to invest in a fundamentally high cost petrochemical centre in NSW to undermine Victoria. Consequently the Bass Strait oil and gas reserves failed to support not one investment in the chemical sector. 

Today it (as the Department of Industry, Tourism and Resource, it has promoted an Action Agenda on Chemicals. It is interesting to note the composition of its committees, more importantly, who is not participating and the orientation to technical efficiencies.

Government continues to apply monies to commodity and politically motivated activities in which Australian does not have a competitive advantage.

At the state level, governments have shown blatant naiveté and expended resources to further projects, that with any reasonably objective assessment, had no prospects for success, or which while technically inefficient, do not stand up to objective net public value assessments (eg in particular, those supported by WA government agencies.

State government initiatives

Also see government assistance

The Victorian Government was in charge of the massive oil and gas reserves in Bass Strait but it has never undertaken strategies to exploit these. To its credit, it once employed SRI consultants for an expensive evaluation but never released the report publicly (for good reason). The Coode Island studies demonstrates its lack of serious commitment. State (and national development) was given a fatal blow by that politically motivated decision of the Fraser government of 1979.

The WA governments agencies receive our bouquet for grand naiveté.

Western Australia (notable the quixotic department of State Development, later, Industry and Resources and later amalgamated to Department of Mineral and Petroleum Resources has influence over more than one half the nation's vast oil, gas and mineral reserves. It maintains the largest civil service in Australia dedicated to industry but with a remarkable range of industries that have closed or stagnant after support by government. Some examples.
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In the late 1980, it spent some $400 million in public monies in promoting  a petrochemical venture at the end of a very long (and expensive) gas line. The Petrochemical Industry Company Pty Ltd (PICL) headed by later to be shown as dubious entrepreneurs (one later jailed) proposed to manufacture caustic soda (245 000 tonnes per year) and vinyl chloride monomer (VCM, about 350 000 tonnes) and ethylene dichloride. The plant would have had the capacity to produce about one-half of Western Australia's demand for caustic soda (about one-third of Australia's imports) but has since been abandoned. It is important to note that the pipeline overhead would have been A$1.20 per gigajoule raising the cost some 60 per cent (on today's deregulated prices). This project project would only have been viable if the Government had waived this overhead (ie. a subsidy by other industry or by the taxpayers). 

 
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The state is a major exporter of zircon so it decided to promote a zircon chemical industry with government monies. Initially Z-Tech, once Hanwha, today it imports zirconium salts from China (as any rational assessment would have shown to be the outcome).

 
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A sulfate based titanium dioxide pigment industry was encouraged with financial and land incentives to stay in Bunbury as then SCM. Today it purchases its chlorine from a tiny dedicated chloralkali plant at Kemerton while transporting its pigment product past a competing plant in Kwinana that also purchases its chlorine from a small dedicated plant operated by the same company (Nufarm Coogee) that supplies its competitor. Government  initiatives around 1990, could have reduced chlorine costs with some planning and foresight (acknowledging the governments various evaluations of a port at Kemerton (for two businesses one of whom, Simcoa and beneficiary of government assistance and written down to less than half its value while now operating under new owners).

 
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The government has undertaken extensive research for the development of a port at Kemerton to support what is in reality, by any measure, a white elephant

 
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The support for a steel project (Kingstream) at Geraldton. A group of entrepreneurs took command of low cost iron ore deposits and successfully sought public moneys to offset the inherent infrastructure cost penalties. Details.

 
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$30m for infrastructure for Vanadium Australia. The plant ceased operation in December 2002. Though Vanadium continues to be produced for fast growing markets, this high cost plant closed.

 
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A chloralkali venture in the north of the state at below world scale has been supported by government endeavours. It was below world scale as there is insufficient ethane available though the state exports some of the world's wettest ethane containing LNG in the world. There was an important, oversighted role for government in any event, the extensive government resources applied to its promotion, represented another expression of government naiveté. 

 
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Support for an GTL project (with the federal government) at boutique scale and in a region with very high labour and construction costs.

Conclusion about government

Outside the scope of this section, government agencies have worked to undermine or failed to grasp opportunities for advancing the value adding core to the commodity base of Australia.  There are many opportunities available for positive initiatives by government but demonstrably with inadequate counsel, is not held to account for it misguided activities.

Remarkably, perhaps due to lack of accountability, there is little public outcry. 

In January 2002, the National Secretary of the Australian Workers Union made a press release lamenting the closure of the Australian Vinyls plant at Altona and pointed to government inaction with (justified) concern about future closes. They said the latest sale was a signal it was time for a bi-partisan federal manufacturing policy to assist all sectors including petro-chemicals. The AWU's concern is justified but will probably fail as a few others have done in the past (if not thwarted).

Our recommendation. Simply put, into application Michael E Porter's outstanding review of international industry development, The Competitive Advantage of Nations (our 100 page summary in PDF format). It clearly shows the consequences of the dead hand of government in industry development; even industries that fail the test of industry support (notably in WA) have developed internationally competitive enterprise (eg, the Italian ceramics industry). That said we DO see a very important role for governments in Australia. 

Industry associations

Industry associations serve an important role as the voice for industry able to communicate issues of collective interest of their members. One industry association however has contributed to serve to prejudice new investment.
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