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GOVERNMENT - and the collapse of the chemical industry in Australia

We receive many e-mail messages. While our general views and motivation are expressed in the Why (we spoke) section, our response to some are reproduced here.

Projects should be seen as an integral part of industry development. In the last decade and a half, there has only been just 2 (two) export-oriented investments in chemicals (by WMC in ammonium phosphates and Tiwest in TiO2 pigments). There is only one company owning and actually developing organic chemistry technology. While there are many interested investors looking at Australia, like the PPP, they only defer action, today.

It is time to recognise that magnesium metal production, titanium metal, titanium dioxide, a chloralkali industry (with EDC/VCM) are potentially related with cost savings. So too with the prospect of methanol that should be developed with other petchems. We wonder if the relationships are understood by those promoting investment in Australia? We think not. The LPG extraction unit operated only since 1995 by the NWSJV effectively killed the PPP based on ethane - if it ever existed. Scope for so many initiatives and some fiddle while opportunities continue to be lost. Platitudes of projects over-the-horizon continue to be offered by government and no major resource projects have evolved in Australia since the 1980's (with Olympic Dam mining in South Australia). Government continues to throw money at mature technology projects.

bulletConsider the Action Agenda on Chemicals.
bulletOther opinions
bulletGovernment assistance

If you agree, disagree or simply want to express an opinion - drop us an e-mail.

 
bulletOur presentation to the House of Representative Standing Committee Inquiry into Value adding to Australia's raw materials (a new paradigm for industry development.)
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Speech to RACI Convention, (Adobe PDF format) Canberra 7 February 2000. Details issues, including government initiatives and developments in Asia as they impact on Australia.

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Keynote address to Expo 2000 September 2000 ( email for PowerPoint presentation) 

Below are a few emails and comments  and some observations follow next.

Why the chemical industry did indeed collapse as predicted by one industry association?

Press for summary

You said Our comments
$350 million buys prospect for $1 400 million alumina refinery in Queensland.

A discussion 

Details of 25 per cent government subsidy for alumina manufacturing centre in Queensland. Does it set a precedent for Australia? It certainly undermines the prospects for the PPP in WA (major petchem project dependent on ethane that is available from domestic gas only). See below.
Action Agenda on Chemicals by DISR

I agree with most of your sentiments regarding the C & P Action Agenda on your web-pages.  I was ticked off about the composition of the Committee, which I saw as too heavily biased by chemicals companies.  

They avoided issues of "Regulation Reform" and infrastructure issues that were clearly included for the chemicals industry and were outside of our mission of education and innovation. 

The bottom line is, I believe, that the government won't go near reg. reform - and that nothing will be done to align our regulations with overseas (which you see as a not much of a step forward, and I agree). Another proposal of the "reg." group, as I recall, was that the government should provide a bunch of infrastructure in the Northwest shelf region to entice investment  - but the government (I would suggest) believes that we will never be as competitive as any number of Asian countries (on both the cost of construction and operation of major facilities), and therefore they are highly unlikely to spend any money. 

When Altona, Spotswood, Geelong, and Botany finally pass their use by date, sadly we will be an importer of chemicals and commodity plastics.  I don't see that as necessarily a bad thing if we are doing smarter, higher value activities elsewhere; but, we don't seem to be doing much of that.  The government has no vision, while most of our neighbours are steaming ahead. Soon, they'll walk over us altogether in process manufacturing.

H Mc Jan 2002

Another 

DISR is helping to create a McDonald's chemical industry in Australia. 

R C March 2000

An Agenda?

Please refer to the DISR site

A question of who steers

If you are keen, read chapter 2 of the 'The Rise and Decline of Nations' by Mancur Olson, Yale University Press 1982. 

Government purchases technology

The Federal Government purchases technology to manufacture petrochemicals in the NW of WA.

Buying smartness?

An interesting development is that the Federal Government has become a licensee of technology to produce petrochemicals and loaned $40 million to support R&D. It is an interesting first-time development to promote technology that has been successfully achieved in countries such as Japan and Malaysia that trade market access for technology. 

$250m government money to help alumina investment in Qld
What is your appraisal of the $100 m being offered by Invest Australia (today Austrade) for Comalco to establish an alumina refinery in Qld?

J O'C
July 1999

Is there a net benefit?  We question it

Invest Australia (now Austrade) is offering a $250m incentive to Comalco to establish an alumina refinery in Gladstone Queensland. The refinery has been identified as important to underpin a gas line venture to bring energy from PNG across the Torres Strait to Qld as it will require 80 petajoules pa of gas when expanded to stage 3.

In W.A. the PPP is held back by scale limited by available ethane feedstock that can only be economically extracted from domestic gas. Clearly any expansion of local demand, including by alumina producers Alcoa and Worsley, are important contributors to it viability. Only some 500 000 tpa of ethane could be extracted at present from domestic gas (it is uneconomic to extract from LNG).

In a global market, promoting a new alumina producer in Qld, clearly works against expansion of its expansion in W.A. and hence the supply of ethane for the ethane-dependent PPP. In other words, while the offer by the Government may bring foreign energy to Qld and another alumina producer, it is also undermining the potential supply of valuable ethane to the PPP and hence reducing the economic viability of a feedstock-dependent project. Quantified, the refinery in Qld will, in displacing expansions in W.A. 's alumina refineries, reduce the supply of ethane by some 150 000 tonnes pa - a very valuable 25 per cent of ethane available now. 

More than that, the PPP, unlike the Comalco refinery, can seed a range of high value-adding projects including those that produce chlorine as a by-product.

Therefore while one part of the balance sheet that Invest Australia (now Austrade) can use to demonstrate the benefit to Qld of its $100m incentive, on the debit are the reduced viability of alumina expansions in W.A. that would benefit from scale economies, the PPP and related chemical projects. The evidence points to a public cost from Invest Australia's (Austrade) involvement in the market place that has to be carefully considered against any externalities. Even the offer, if match by Malaysia would, in improving the competitiveness of Comalco over Alcoa and Comalco, would not be in Australia's long term interest.  

Clearly the matter is more complex than this, for example it could be reasonably argued that Comalco would simply locate in Malaysia and hence still disadvantage the ethane supply in Western Australia. Nevertheless one still has the anomaly that this incentive undermines not only discriminates against existing alumina producers (with scale economies). It also undermines any assistance that the government may also offer the PPP venturers (as is likely).

Some value-adding analysis points to a net cost and that is before considering the impact on alternative gas from the Timor Sea.

Some careful analysis is required. Notwithstanding that presently there is no market in ethane for Australia, the disturbance of competitiveness and an erosion of any negotiation with the PPP venturers undermines equity and public interest. 

Government and the chemical industry I am preparing an article about the role of Government and the development of Australia's chemical industry. What are some highlights?

J McK
October 1998

Government - once important, now no interest You might care to read my presentation at the First Australian Chemicals Summit.

Australia's chemical industry originally grew driven simply by the need through to the early 1920s. Thereafter, following the protectionist lead from USA, import duties and restrictions on imports were instituted by the Government that enabled high-cost activities fundamentally uncompetitive against more competitive overseas operations. These included Timbrol, CSR Chemicals, Monsanto Australia and ICI ANZ.

The federal government progressively wound back barriers to competition beginning 1960 dropping import licensing and most notably in 1973 when the Whitlam Government reduced import tariffs by one-quarter triggering off rationalisation in products and the companies.

An inquiry by the Industries Assistance Commission due 1978 was deferred by the Fraser Government in return for a high feedstock cost cracker investment at Botany that served to divide the Australian petrochemical industry with Altona. In the 90s, the Keating Government reduced tariffs to 5 per cent.

The chemical industry remains off the politicians' agenda despite its outstanding potential. 

Why is there so little direction in Australia?

Some points raised/discussed at the recent Chemicals Summit.

No leadership from Government I would summarise it simply as...

1. Under-skilled or under-resourced government agencies
Some Government agencies with responsibility for industry are under resourced topping it from sub-optimal sources. Priorities are sometimes motivated by politics and they are focussed on national and overseas counterparts ("clubs").

2.Lack of vision
Some vision is overdue and the key is getting through to the public as so clearly illustrated at the Chemical Summit.It also confirmed a lack of vision by Government. For example while the federal government has produced a paper "Investing for Growth", which defines its role in promoting investment (such as grants, tax relief or the provision of infrastructure services based on eligibility criteria) it was not even referred to in the presentation by the Director responsible for the chemical industry (confined to some basic performance figures and details of overseas initiatives by governments).

"Raised my blood pressure!" My blood pressure rose when you mentioned that South Australia lost its chance to have a petrochemical industry because Orica bought its ethane reserve. It was an open bid and Orica simply provided the best offer.

R.M. in discussion, August 1998.

Industry just following the rules I made a strong statement from my long experience with the chemical industry. Our chemical industry, during the period involving the gas pipeline to Botany, acted responsibly, justifiably and in the best interest of Australia. That is not to say that the outcome would not have been vastly better for Australia's long term development with non-expedient and considered government policies in earlier years (most notably by the Fraser Government).

The point was made in the hope of promoting a more positive and visionary thrust from the Federal Government having been influenced in earlier years by political expediency or simply being without vision. There are more expressions around Australia and not confined to the Federal Government initiatives.

Jurong Island model You make mention of Jurong Island as a model for Australia, what is it?

K. Australia June 1998

Singapore recognising public benefit Jurong Island, actually a group of small islands off the sw boundary of the main island of Singapore, are being consolidated by land-fill to be become a major distribution and storage facility with shared utilities and port facilities. It is likely to become one of the largest chemical manufacturing centres in Asia. The Government of Singapore will contribute S$7billion (US$4billion) to its development.

Singapore clearly recognises the returns on its investment so that even though it does not have raw materials, land is scarce (and expensive e.g. US$20/sq m) and there is no import duty, dumping does not occur, it exports 90 per cent of its production valued at S$17 billion (US$10 billion)!

Australia's government should take note of what Singapore is doing rewarded by its fast growing industry and booming economy. By the way, the corporation tax is only 26 per cent and no import duties!

It has an Economic Development Board driving the rapid growth of Singapore - again sadly absent in Australia.

There is much more that could be said about Singapore. Thank you for raising it.

Government What function does your [Australian] government play in investment in the chemical industry?

H AK Malaysia (Jan 1998)

Lost its way Let me go into some more detail as it has been variously raised.

Up to the late 1980s, our federal government was the main direct influence on industry. Import tariffs and anti-dumping legislation were the main instruments. After reducing tariffs to a maximum of 5 per cent, only anti-dumping legislation and taxation remains. The federal government still has many indirect influences. Notable is the Australian Competition and Consumer Commission that ruled on the gas line deal for An Feng Kingstream. In effect, national interest considerations weighed against the benefit to regional industry. Overall, the federal government has assumed a laissez faire position and industry development has assumed a lower priority. For example, DIST, the federal agency responsible for industry development, changed the function of the letter "T" from Technology to Tourism. A sad reflection of priorities in Australia where labour-intensity and low value adding is ranked before industry and technology. In any event, the two are unlikely bedfellows. Industry is higher value added and can export. (UPDATE, the agency has been restructured in October 1998 with "resources" replacing "tourism". An overdue change!)
The States now have more influence on industry through infrastructure provision and other concessions. Some governments have poor track records.

In 1991, there was a fire and explosion at the Coode Island storage facility in Port Melbourne. Though no one was injured and few acutely hazardous chemicals were involved, it became the subject of a Victorian government-funded inquiry costing more than $10 million of public money. By any objective and professional assessment, the need for relocating it to the Point Lillias reserve on Port Phillip Bay was barely addressed. Though now upgraded, the facility remains. What more productive things could have been done with those millions and all that public participation?

In 1988, a government of Western Australia promoted PICL - a petrochemical project at the end of 1 500 km gas line to Perth. The pipeline tariff, that could have inflated the gas price by around 50 per cent, was to have been subsidised by others under a discrete government arrangement. Thankfully it failed though it left West Australian taxpayers with a $400 million debt. PICL was just one of four projects supported by State governments in the last two decades that were fundamentally weak and/or subsidised.

A decade earlier and still affecting industry today, was an expedient decision by the Fraser Government in 1978 to defer an Industries Assistance Commission review of import tariffs on Australia's chemical industry. A deferral in what would have been an inevitable tariff reduction was in return for a new ethylene plant at ICI's Botany complex. The feedstock was LPG shipped from Victoria and some local naphtha. The investment served to retain a high-cost petrochemical industry in New South Wales that was vulnerable to dumping and unable to export without heavy discounting. More importantly, it stymied the Altona complex in Victoria, twice signalling its intention to increase production using very cheap gas from Bass Strait.

This also raises the question of intervention by a State government. For example, should the Queensland government have interceded on the ammonium nitrate project at Moura? Competition should provide for lower explosives prices for companies such as BHP. On the other hand it works against Orica's proposed ammonia plant at Yarwun. This project would, in using 11 petajoules of gas, help underpin the PNG gasline stimulating other industries including alumina with access to cheaper gas. Here there are two conflicting interests - the coal industry and industries stimulated by the gasline. I can think of two other current examples.

One of them was in WA when the state government of the day promoted the development of the Kemerton industrial park and paid SCM, now MIC to set up a chlorine-using TiO2 pigment plant. Chlorine is twice the international cost - the company could have been encouraged to locate at Kwinana to share the chlorine with Tiwest. MIC's pigment continues to be road freighted past Tiwest and scale economies for chlorine lost. The state still exports more than 80 per cent of its titanium mineral unprocessed - the high cost of chlorine an influence.

A long answer to a simple question.