Australia's Chemical Industry - government influence, performance and outlook.

Paper presented by Remco Van Santen to the First Australian Chemicals Summit, 10,11 August 1998, Sydney Australia.


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This paper attempts to place Australia’s chemical industry in perspective. To stimulate an interest in what once the most dynamic component of our manufacturing sector. You will hear information that is original, based on long unfunded research by my company which is therefore unbiased.

My aim is to help create a vision. We are often less interested in today than in tomorrow, and are even less interested in the past. But understanding the past is the key to shaping tomorrow. I want to help forge that industry which we should have had.

The large Bass Strait oil and gas discoveries once presented Victoria with an outstanding future. We lost the opportunity. The State could have joined Canada and other key producers as major chemical centres, instead and politely put, lost due to the na´vetÚ and political expediency of a Government. My aim is to promote the industry’s potential including in particular, from the North West Shelf oil and gas reserves for I doubt with developments in Asia, there will be a second chance! Government has a role there but is it willing?

Just three months ago there was an event that was not fully comprehended by the press - it was a milestone for Australia's chemical industry. It represented one of the last undoings of government influence that shaped Australia’s chemical industry when Kemcor and archrival Orica proposed a joint venture. Let me come back to it later because I want to look at the beginnings of the industry.

The speakers today will provide their impressions of what is shaping their businesses. But in the little time available, I will share some insights to place things in perspective so that the milestone will have meaning. I will show how the federal government directly shaped the core of the chemical industry in New South Wales and Victoria, and provide a snapshot of the industry and some pointers to the new industry. As I will show, there is an important role for Government. So let me begin.

The beginnings of the chemical industry

In the beginning, and that was the middle of last century, there was agriculture and mining that required fertilisers and other chemicals. This established the beginnings of the Australian chemical industry. Fertilisers, acids and chloralkali were produced by modest scale operations. Then in 1925 came the first Australian organic chemical company Timbrol, at Rhodes on Homebush Bay, New South Wales. Monsanto soon followed at West Footscray, Victoria in 1928. From 1940, ICI ANZ invested extensively to dominate Australia's chemical industry establishing businesses in New South Wales at Botany and Newcastle, in Victoria at Deer Park and Yarravile, and in South Australia at Osborne. In 1948, a second truly Australian company, CSR Chemicals, established at Rhodes next to Timbrol. It began with sugar derived chemicals, largely alcohol, ending up before closing in 1997, with phthalate ester plasticisers. Australia's chemical industry was by any measure booming.

The product range exploded to multiples of what is produced today in Australia - it included antibiotics, aspirin, carbon tetrachloride and other halocarbons, carbon disulfide, chlorinated pesticides, chlorophenols, herbicides, mannitol, oxo alcohols, phenoplasts, phthalic anhydride, phthalate esters, polyvinyl acetate, rubber preservatives, sorbitol, styrene, vinyl acetate, vinyl chloride and xanthates.

It was a remarkable three-decade period and some very innovative technology evolved in Australia, especially by these two Australian companies, Timbrol, later to become Union Carbide Australia and CSR Chemicals, later ICI Rhodes. Some very clever chemistry was developed and applied in true Australian spirit against some very strong American and British-owned competition that was establishing in Australia. That period could reasonably be described as the golden era of our chemical industry. It was a boom by any definition. Now let’s look at the last 25 years.

Since the mid 1970’s, employment in the chemical industry has fallen by a third to just 45 000 - and that is direct employment. If the services and dependent industries are included, the 25 000 reduction is much greater. The impact on research and development skills another loss. All those chemicals I just listed are no longer produced in Australia, and Rhodes, the site of so much innovative and creative chemistry, no longer has a chemical industry. We could reasonably describe the situation since the mid 1970's as a collapse - just like the industry leaders predicted would happen if protectionism was dropped. Let me describe the situation prior to this collapse.

Protectionism

Up to around 1960, Australian manufactured chemicals were at least 30 to 60 per cent more expensive than in the USA and UK. Heavy taxes were levied on imports, like a consumption tax, if they competed with Australian made goods. These taxes raised domestic prices by 40 to 60 per cent. If that was not enough, foreign goods were also restricted by a system of import licensing, and often a "primage duty" was levied. Think of what you as a manufacturer could do if your operating margins could be doubled, trebled or quadrupled. Of course it was then not generally so much a matter of super profit margins, rather of what those measures did - and that was to enable activities that were not otherwise competitive.

These import tariffs were considered necessary as manufacturing industry in Australia was labouring under the twin burdens of expensive labour and inefficient services. In reality they also compensated for a host of inefficiencies that have only recently been redressed.

For example, it was claimed then to be cheaper to ship soda ash from Adelaide to Sydney across the equator via Japan, than around our coastline. So, if we wanted a manufacturing industry, then there had to be a "wall" around Australia - and that wall was provided by Government with taxes and restrictions that were in the end paid for by consumers. These plastered over the defects of our economy and paid for by a then more affluent society.

However while achieving one end - promoting important industries for an island nation so distant from mother England, there were undesirable outcomes whose shadows are still here today.

Australia’s manufacturing industry was by these protectionist measures implicitly encouraged to diversify and duplicate - even treble production centres. The casualty of course was size - so important in manufacturing. The manufacture of car batteries, tyres, whitegoods, motorcars, steel and chemicals, to name a few that depend on size, were spread around and competed for the small Australian market. At Botany for example, the key feedstock ethylene has been used to produce low density polyethylene, linear low density polyethylene, ethylene oxide, ethanolamines, vinyl chloride and a many halocarbons. If there had been just one cost-competitive polyethylene plant, then all that ethylene would have been used by it without any left over for all those products. The inefficient fragmentation of so many important activities was simply the logical response to the Government’s policy framework of the day.

Exports of course were obviously impossible unless heavily discounted by at least 20 to 30 per cent on what could be achieved in the home market. There was no incentive to pursue volume to lower costs with a more profitable home market. In fact, I remember in the 1980’s when only one chemical company in the industry had a manager with the primary responsibility for exports while the same company had several government relations managers. This is clearly a statement about priorities of the day!

Fragmentation means scale penalties. As I said, to export from Australia then required a substantial discount on home market values - so exports were less profitable and hence used to avoid underutilised capacity. Altona was proudly described as "the most integrated petrochemical operation in Australia" but what a cost to users and consumers of its products and all those foregone opportunities! It barely exported, and the anti-dumping tribunal was very busy making Australia world prominent with claims for anti-dumping relief. Reflecting efficiencies, Singapore and Japan never need to use this form of protection.

Undoing protectionism

Although the reduction in tariffs began with the Whitlam Government’s 25 per cent across the board cuts, it really began to hurt industry when the Hawke and Keating Governments halved and then quartered import tariffs beginning 1987.

The long knives came out and jobs were slashed. The chemical centres at Altona, Botany and West Footscray lost one-quarter of their people. CSR Chemicals and Timbrol companies, by then under their new owners, closed, and oxo alcohols, vinyl acetate, styrene by Dow, specialty esters, phthalic anhydride, phthalate esters, VCM etc. to name a few, ceased to be produced in Australia.

The impact is shown in Figure 1 which my company developed showing the significance of the chemical industry to Australia (expressed as value added as a percentage of Gross Domestic Product (GDP)) since the beginning of this century.

   

Figure 1 The significance of Australia's chemical industry 1905 -1995. Value added as % GDP

Peaking in the mid 1970s, after three-quarters of a decade growing strongly to represent 3 per cent of GDP, the importance of the chemical industry collapsed to just one-half in just two decades - to below 1.5 per cent of GDP. What a rout those two decades were! How many careers were destroyed and what anger was vented at public forums. What hurt to our research core.

Now that is in the past, so what?

The Altona Petrochemical Complex

There are many legacies of that time and some are the investments we lost. There is however one more important event that I want to raise before I return to today and the future.

The Botany chemical complex, just south of Sydney, was established by ICI ANZ in 1940 to become the core of its domination of Australia's chemical industry. A remarkably broad range of chemicals was produced. Among its plastic resins, ICI had the Australian market for polyethylene and PVC to itself for two decades. Then, in the small Australian market, a competitor evolved in the rival state of Victoria as Premier Bolte got the edge over South Australia’s Premier Playford in establishing a petrochemical complex. (Rivals the States were and still are - remember it was only two years ago that Bass Strait gas, Victoria’s windfall, was allowed to be sold by their Government to New South Wales.)

In 1961, the Altona Petrochemical Company (APC) with several co-venturers established a complex at Altona south west of Melbourne. Like ICI, they too used feedstock from a petroleum refinery - so in that sense they were on par. Then, just four years later there was a windfall, a very big one with the discovery of the Bass Strait oil and gas reserves. With a pipeline to Melbourne, the newcomer at Altona was in a prime position, and the 40 to 50 per cent import tariffs of the day were not even reduced to reflect their greater competitiveness. What a bonus and what potential it had!

APC became exceptionally profitable. ICI however could only ship LPG feedstock from Bass Strait to Botany. So it was said that tariffs helped ICI and profited APC.

Then 1978, and the Fraser Liberal Government was in power and the Industries Assistance Commission (IAC), with an established record of only reducing tariffs was due to review the assistance regime for the chemical industry. ICI was producing chemicals around Australia, protected by import tariffs of 30 to 50 per cent. Any tariff reduction would clearly hurt. ICI made an offer to Government. If that IAC review would be deferred, ICI would invest $400 million in a 250 000 tonne LPG/naphtha cracker at Botany. Remember, Botany would be using far more expensive feedstock than available in Victoria. The Government accepted the offer, deferred the review, and the press could soon promote a new investment and in particular, new jobs at Botany. The national cost of that decision distributed and politically invisible and impacting in another political cycle.

Interestingly, also at that time and with a whiff of the deal, Altona offered to expand. Ironically and in contrast with ICI, they could in fact benefit from a tariff reduction which, by impacting on lower prices, would contain their NSW-based competitor by discouraging that very awkward investment.

Botany got its "white elephant" (or so that LPG/naphtha cracker was referred to in industry circles). It was even underutilised with exports of surplus ethylene and never used the potential C4 feedstock stream that helps cracker economies. The deferred tariffs did however help ICI’s margins for soda ash at Osborne, vinyl acetate, phthalate esters and speciality esters at Rhodes, ethoxylates, VCM, PVC, caustic soda at Botany, and a host of other activities around Australia. Simply put, the maintained level of tariffs on all ICI’s chemicals paid for the uneconomic LPG/naphtha cracker at Botany - from ICI’s perspective, it was cross-subsidised. Unfortunately for ICI and the rest of the chemical industry, the Hawke government soon came to power in 1983 and the IAC’s tariff review was back on the agenda. In 1987, tariffs were slashed to a maximum of 15 per cent.

It would be fair to say, that Botany would have closed by now, with the Australian market for plastics and rubbers supplied by a larger complex at Altona using the plentiful Bass Strait gas. Victoria’s Altona Petrochemical Company, now part of Kemcor, never developed to its full potential. In one rather good year, in 1983, it enjoyed a 106 per cent return on shareholders funds, but is now even more undersized though sitting on that 1965 windfall in Bass Strait. I am advised that closure has even been discussed.

So sadly, Bass Strait has come and is now fading. We got cheaper petrol and gas. What a loss – what a different industry profile we could have had. Even South Australia was influenced by that Fraser Government decision.

South Australia

South Australia long had a dream for a chemical industry. It had for many years been carefully stripping valuable ethane from its reticulated domestic gas and reinjecting that potential feedstock into the ground. There was even a "Preservation Act" to protect its dream for its very own petrochemical industry, notably at Redcliffe. During the 1970s, there was serious interest by a range of companies, including CRA and Dow, for a chloralkali project at Redcliffe.

1997, South Australia had been promoting petrochemical projects but there were no takers after two decades, and the State Bank debacle emptied their coffers. Botany too was increasingly under pressure using more expensive feedstock than its Victorian competitor and tariffs had fallen to just 5 per cent. In a win-win deal, ICI made the best offer and bought South Australia’s dream for its own chemical industry - its banked ethane.

For $250 million, a 1400 km umbilical began to convey South Australia's aspiration to New South Wales. We estimate more ethane is taken out than South Australia had been reinjecting, so Orica, as ICI is now known, is reducing the State’s reserves and potential for its petchem industry. In Victoria, Altona continues to take out less than one-half the ethane available from Bass Strait gas.

Now ethane-based, Orica has closed its polypropylene, EDC and VCM plants so that Botany has essentially become a polyethylene producer. That new pipeline is being considered for sale as Orica is now slowly bowing out of the little that remains at Botany.

Now to my opening point.

That turning point.

Let me now come back to that turning point I referred to earlier.

Just 3 months ago, Kemcor, the successor to the Australian Petrochemical Company, indicated a joint venture with Orica in polyethylene resin. Not recognised was that Botany, ICI’s cornerstone in Australia, was by then producing little more than LD and LLD polyethylene resins though acknowledging the ethylene oxide products. In effect therefore, Kemcor is almost purchasing Botany and its MD would became CEO of the joint venture. What should have happened a long time ago was now almost happening. Victoria’s better-positioned chemical business began to finally extend itself with cost reduction benefits.

What impact that naphtha, now ethane, cracker at Botany has had on Australia. And what influence that one decision by the Fraser Government had on the shape of the petrochemical industry. It is not unreasonable to speculate that the deferment of the tariff review killed South Australia ambitions for a petrochemical project. At least Victoria’s petrochemical industry would have been much larger and more stable than today if a long term perspective had been taken by Government and stood by the scheduled review by the IAC of import tariffs!

It is only one snapshot with so many others I could share. The point being made is that the federal government in the past has had a pivotal role in shaping our chemical industry. The government agencies today are very different - better skilled and informed and world-class - just look at our international Chemical Weapons Control initiatives and one of our speakers tomorrow, Dr Kennedy can vouch for our international expertise on the environment. I simply wanted to make a strong point to place the industry in perspective with a background to annual reports and public statements. I hope you agree that it is important. Let me now describe today’s industry.

A Cook’s tour of Australia

A quick around the country for those of you not so familiar with the nature of Australia’s chemical industry. Common success elements are apparent.

New South Wales

Botany, is as described connected to South Australia’s banked ethane and soon to be part owned by a Victorian-based company. Rhodes is closed. Nearby is the Shell Refinery at Clyde where Basell produces polypropylene resins from refinery by-product. A question mark over Australia’s fragmented and underscaled refining industry, has led to some to speculate about refinery rationalisation suggesting NSW should only have one refiner.

To the north is Newcastle struggling to adapt to a new future without steel. There Incitec, largely owned by Orica, produces ammonia and ammonium nitrate for fertilisers and explosives for Australia’s sugar and resource industries. There also is Koppers producing naphthalene, (once the raw material for CSR Chemicals at Rhodes) and there is a copper smelter at Port Kembla that would produce sulfuric acid as a co-product that will need an application. The State’s chemical industry is a shadow of itself.

Queensland

Queensland, is showing great promise. Just out of Brisbane on Gibson Island, Orica’s Incitec produces ammonia and ammonium nitrate as well as urea. Like at its Newcastle operation, Incitec’s ammonia plant at 250 000 tonne capacity, is now at the low end of world scale which is near 1 million tonnes.

Wesfarmers with Dyno Nobel are going ahead with a project conceived by BHP just east of Gladstone at Moura called Queensland Nitrates. This project could have tested the Queensland’s Government’s resolve not to interfere in the marketplace. Moura’s ammonia and ammonium nitrate project would appear to have thwarted Orica’s immediate plans to invest in an ammonia plant to supply its ammonium nitrate and sodium cyanide facilities at Gladstone. Drawing a useful 11 petajoules of gas, Orica’s investment would have helped the proposed PNG gas line still contingent on a prospective alumina refinery to provide a baseload to underpin the $2 billion investment. On the other hand, the venture is breaking the monopoly in explosives on the east coast that prompted BHP to seed the project to achieve cheaper explosives for its coal business.

Sodium cyanide is used in gold extraction and Australia has three similar sized world-class producers collectively producing about 100 000 tonnes per year. Orica and Ticor each produce sodium cyanide at Yarwun near Gladstone. Orica there also produces ammonium nitrate from ammonia freighted from its Incitec plants in the south. This arrangement is enabled by the fact that ammonium nitrate is 2.3-times as heavy and even more bulky than ammonia providing useful freight cost savings for its manufacture closer to the market than at Brisbane.

To the west, Mount Isa’s metal smelter will no longer flue its sulfur dioxide and will now produce sulfuric acid. This low value and expensive to transport chemical is helping an exciting new ammonium phosphate fertiliser project by WMC. Combining the Mt Duchess phosphate deposit with this low cost acid will provide for Australia’s first export oriented world-class phosphate fertiliser industry. In keeping with its strategic skills, WMC has been preparing its home market for 10 years with its HiFert fertiliser marketing company. Interestingly in W.A., fertiliser manufacturer Wesfarmers CSBP owns a phosphate deposit at Mt Weld located north of sulfuric acid producing metal smelters near Kalgoorlie. Perhaps WMC may be joined by another ammonium phosphate producer in the future. Today’s status with of all our phosphorus being imported, simply solubilising it to superphosphate, is clearly ending.

One fascinating project still at the pilot stage is a magnesium metal venture based on the Kunwarara magnesite deposit near Rockhampton. It will commence at around one-quarter of the world’s production of magnesium. It will require chlorine with by-products.

Queensland is the state to watch with excellent prospects.

Victoria.

Victoria still has the Bass Strait oil and gas reserves. Apart from the polyethylene, propylene and synthetic rubber operations at Altona, there are two PVC resin plants owned by the newly formed Australian Vinyls Corp (AVC). The company produces PVC resin by polymerising imported vinyl chloride monomer (VCM) which is road freighted from Geelong to Laverton and Altona. As part of its strategy to get out of plastics, Orica wishes to sell its shareholding in AVC. Seemingly unable to find an international buyer, I believe there are now plans to float AVC in Australia. Some rationalisation of the two production centres is probable in my estimation.

Almost in the suburbs of Melbourne at West Footscray, the former Monsanto complex, now one-half owned by the Kerry Packer group of companies, is Huntsman Chemicals. As Monsanto, chemicals ranging from aspirin to rubber preservatives were once produced. Today Huntsman Chemicals, once also known as Chemplex, produces only polystyrene and other styrene resins, as well as some phenol and acetone. With diminishing local supplies, nearly all its required benzene raw material now has to be imported. Shell, No doubt looking at the 80 000 tonnes of benzene raw material imported through Coode Island, considered its production in Australia. It rejected its production in 1993 expressing doubts about a long-term market for it in Australia.

Other activities in Victoria include the manufacture of phosphates by Albright & Wilson at Yarraville from imported elemental phosphorus; aminoplast and phenoplasts resins and adhesives by Orica and Borden; polyols from imported propylene oxide by Dow Chemical and Basell produces polypropylene resin at the Shell Refinery at Geelong.

The Kennett Government once commissioned a half-million dollar study by SRI but never released it. The potential once presented by Bass Strait has faded though a small scale chloralkali plant will be built to replace Orica’s unit at Yarraville and there is a feasibility study for the production of ammonia.

South Australia

Penrice operates the 1940 investment by ICI ANZ, producing some 400 000 tonnes of soda ash by the Solvay process. It uses local salt, limestone and competitive gas. ICI had sold its business in 1990 and it became very profitable under new management and today is owned by US-based MCI International. Soda ash is sold to ACI glass operations and chemical companies with exports.

With Orica taking out more ethane for its Botany plant than South Australia produces, the reserves will now not support a petrochemical industry in the State. There are excellent prospects for a pig iron project and sulfuric acid is produced at the giant Olympic Dam mine.

Western Australia

Western Australia – once the Iron Ore State, today produces more gas and oil than Bass Strait. In the late 1980s, partnered with a local entrepreneur, the State Government attempted a petrochemical project just south of Perth. It was to be located at the end of the 1500 km gas pipeline from the North West gas. The $1.20 per gigajoule cost of transporting the gas to the end of the line was to be paid for by others. Thankfully it failed, hopefully to be replaced by the Pilbara Petrochemical Project, this time at the top of the pipeline, and larger.

Titanium dioxide pigment is used as an opacifier and white pigment in paints and resins with fast growing demand. There are two producers in W.A. based on the extensive deposits of ilmenite and using the environmentally favoured chloride route. The industry is new, world class and export-oriented. At the Kemerton industrial park, near Bunbury south of Perth, is Millennium Inorganic Chemicals, formerly SCM, producing some 80 000 tonnes of the pigment. Though planning to double production, even 20 to 25 per cent returns on shareholders funds is not enough to give it confidence to commit to expansion. This, though nine-tenths of W.A.‘s production of titanium mineral is exported for overseas processing to the pigment. It suggests much potential for W.A.

The other pigment producer is Tiwest at Kwinana - the main industrial park south of Perth, in a plant comparable to MIC. It too has plans to double its production.

Both these producers use chlorine, which is expensive to transport and therefore manufactured "across the fence" by Nufarm Coogee that operates two 18 000 tonne membrane cell chloralkali plants. Between 4 and 5 tonnes of chlorine is required for each tonne of pigment produced. As described later, the caustic soda is effectively a by-product in a state which imports 700 000 tonnes of caustic soda for the alumina industry but with less than 50 000 tonnes produced locally.

Also at Kwinana is AGR producing around 35 000 tonnes of sodium cyanide at a scale comparable to the Ticor and Orica plants at Gladstone Queensland. By being close to their markets, they are able to supply the cyanide in liquid form, and so AGR avoids the substantial drying costs incurred by their competitors, including in Queensland.

Ammonia and ammonium nitrate are produced by Wesfarmers CSBP at Kwinana and a replacement 250 000 tonne ammonia plant will bring it to similar scale as the Incitec plants at Newcastle and Brisbane. The new fast growing star at Kwinana is Coogee Chemicals with out-of-textbook strategies that now sees it producing xanthate chemicals used in mineral flotation. Like the metham sodium pesticide produced by neighbouring manufacturer Nufarm, xanthates requires carbon disulfide which are presently imported.

State round up

In conclusion for this quick tour, one could deduce that common to all these chemical operations is the competitive advantage derived from freight savings which pay for the penalty of using more expensive chlorine than available at competitive sites. For example the production of titanium dioxide is from ilmenite that contains iron oxide that can be safely disposed of near the production centres.

The point to be noted is that once the competitive edge was given to industry by government policies that resulted in consumers paying higher prices. Now with import tariffs at below 5 per cent, freight and energy are key to competitiveness.

So with all those changes, how is the state of health of the industry?

I will now provide some snapshots of the industry's performance that we have prepared from our research.

The Industry’s performance

The chemical industry in 1994-95 had a turnover of $15 billion of which two-thirds is by the physical blending of chemicals (Figure 2). 

image24.gif (12693 bytes)

Figure 2 Two-thirds of the $15bn (1994-95) chemical industry are mixers and blenders of chemicals.

For this and subsequent figures, please press to see enlarged versions

Profits

What about profits as the pulse of the industry (Figure 3)? 

Figure 3 Profits as % shareholders funds. Chemical sector of PACIA 1976-1995

Not published directly, we have had to derive the combine some figures produced by the industry association, PACIA. Returns on shareholders funds for the last five years including 1996 by their figures for commodity chemical and resins manufacturing, averaged 9.5 per cent. Australia's largest firms (those with public disclosure) achieved only a 5.1 per cent over the same period according to IBIS Business Information "Secrets of Spectacular Success" published in Business Review Weekly (BRW). Clearly there are many underperformers in the chemical industry as that 9.5 per cent return also includes chemical giant Orica with an average of 12 per cent, and Millennium Inorganic Chemicals (formerly SCM Chemicals), with 25 per cent.

It is important to note that when capital is written down, the shareholders funds contact and improving the return on shareholders funds. The return on new capital in the industry – the driving force for new investment, remains unacceptably low!

Given the reductions in tariffs slashed potential gross operating margins, the profitability of the chemical industry is little short of remarkable. It is a credit to its management, though again, the process of their accommodation to the more open economy has destroyed many careers.

Table 1 shows data published by BRW October 1997 (showing data prepared by IBIS with latest available with companies ranked by revenue).

Table 1
Company Revenue (A$ millions) Net profits after tax % shareholders funds
Orica (ICI Aust) 3508 13
Incitec 955 23
BOC Gases 781 28
Kemcor Olefins 326 5
Dow Chemical 275 11
Millennium Inorganic Chemicals 239 17
BASF 236 0.1
Basell 214 9
Huntsman Chemicals 247 14
Gibson Chemicals 199 21
Australian Chemical 188 7
APS Chemicals 158 12
Employment.

As I said earlier, employment in the chemical industry has plummeted by one-third in just two decades, from 70 000 to just 45 000. That 25 000 reduction does not include losses at the services industries, research facilities and a host of companies that service the chemical industry. Australia’s chemical industry has been hurt - badly.

A leading indicator of the chemical industry competitiveness is its performance in trade.

Trade

There is well-publicised trade deficit in chemicals of $5 billion such that chemicals now represent one-fifth of Australia’s current account deficit. Interestingly, three-quarters of that trade deficit is attributable to Victoria and New South Wales - the two original chemical manufacturing states as shown in Figure 4. Even on a per capita basis, NSW accounts for nearly one-half the trade deficit and its getting worse!

Figure 4 Australia's $5 billion trade deficit in chemicals by State.

If exports are presented as a proportion of imports, the relative situation for these two states is clearly worsening over recent years (Figure 5). 

Figure 5 Exports as % of imports by State 1989 to 1998 updated)

A general overview of the trade balance by sector is provided in Figure 6.

Figure 6 Imports and exports by chemical sector for 1996.

The value of imports exceeds exports on average by three - very bad. Some say the chemicals trade deficit is getting worse as measured by value. However, while the value of imports is indeed growing, exports are also growing - in fact 50 per cent faster! In the 1980s, imports exceeded exports by a factor of five, now it is down to three – bad, but improving. Interestingly, a similar trend is happening in many Asian countries as they too reduce their import tariffs.

Now if exports are again expressed as a ratio of imports, by industry sector, over time, some useful trends are evident (Figure 7).

Figure 7 Exports as per cent of import by chemical sector 1989 to 1998 (updated)

With some variations, some of the faster growing sectors are; inorganic chemicals, with exports doubling compared with imports; the colourants sector (largely thanks to the titanium dioxide pigment) having achieved a trade balance; pharmaceuticals; while the petrochemical sector, as indicated by the red coloured line for plastics in primary forms, has improved by 50 per cent.

Perhaps a more informative chart for our policy makers is when total trade is expressed as percentage of industry turnover (Figure 8).

Figure 8 Imports and exports as % of industry turnover 1909-1995. Trade reduced with level of protection

A clear "bathtub" chart is evident that correlates with the level of import tariffs. In other words, protectionism clearly promotes an inward looking, low trade industry that produces expensive goods.

So while trade is improving, from such a low base, there is a long way to go before even a balance of trade is achieved. The status is "bad", though arguably "dreadful" given our resource base.

Growth and Efficiency

The following chart summarises productivity and turnover growth for a 12 year period including year 1994. Turnover growth and turnover growth per employee averages for the industry are the vertical and horizontal lines with value 1, being the industry average (Figure 9).

Figure 9 Turnover growth and productivity growth by industry sector 1982 versus 1994

It shows the Industrial gases sector showing both high labour productivity and turnover growth, Pharmaceuticals with high turnover growth (but average productivity growth), Explosives with high productivity (average turnover growth), and dual under-performance of the Fertiliser sector.

The point that should be noted is that the core of the industry, including the petrochemical sector, has yet to stand out from some of the smaller, better performing sectors. I look forward to revisiting this chart in 2003 with the PPP, WMC’s phosphate and other projects reshaping the profile of our industry. For the moment some sectors remain trapped by inadequate scale, lack of good feedstocks or simply being in the wrong place. A little more hurt is yet to come and another closure or two is most likely.

This is all very negative. I thank you for your forbearance. I have to share this for no one else in Australia has been prepared to stand up in public to present the less attractive face. I acknowledge that I have perhaps leant a little far but that was only to correct some of the gospel. Such a position, let me say now, has not helped my company ACTED in its dealings with some parties. Relationships are very important and let me illustrate with "George". George, a former CEO of one major complex, and twenty years into his retirement but "sharp as a whistle", once wrote glowing of my analysis, but ended saying he never met with me and nor should I use his name! I could say much more. I trust you understand my point.

I, like you, want to hear about success stories and opportunities and that is what you will from now hear from me. I will also comment about a role for Government.

I could talk for hours about some of the industries - some are fascinating. Titanium dioxide pigment, sodium cyanide, ammonia, ammonium nitrate and sulfuric acid are growing strongly. Soon Australia will have its first export-oriented ammonium phosphate project about which we will hear more, and new activities are on the starting blocks. All the new industries are based on one thing - comparative advantage. Rationalisation, such as the new joint venture of Kemcor and close competitor Orica, is part of the move to improving competitiveness. It is rewarded by lower cost chemicals and resins that helps downstream industries and our export performance. Things are improving and a new management culture is emerging - look what happened for example with Penrice.

Based on our analysis therefore, I can now confidently say that:
bulletAustralia’s chemical industry has turned the corner and its decline since the 1970’s has ceased.
bulletAustralia’s trade deficit in chemicals is improving. Within a decade, exports will reach at least 60 per cent of imports, from 33 per cent today. Contingent on some investments, this may be a conservative projection.
Australia could again become an exciting place to invest in the chemical industry. One litmus of the new climate will be an exciting potential investment being referred to as the PPP.

The Pilbara Petrochemical Project (PPP)

Given the limited time available, let me talk about one potential project that is not only big, but very important to Australia - more than is generally recognised. It warrants special attention. I am of course referring to the chloralkali project in the Pilbara region in the north west of Western Australia called the "Pilbara Petrochemical Project", or just the PPP.

Figure 10 North west Western Australia with gas lines.

The world is taking notice and I was asked to speak at four international conferences in the past year alone - with extensive questioning. Remember it represents the fifth attempt for a world scale export-oriented petrochemical project in Australia and, without fear of contradiction, if it does not eventuate, then Australia will never have one! This venture however has excellent credentials - the best.

This project is very important as it will signal the world that Australia is once again a place to invest - an important awareness booster. It could stimulate other industries.

It will be based on the production of caustic soda and chlorine chemicals. It derives its predominant advantage from the gas and a little from the freight savings over imports of caustic soda and the required salt. These have to offset some disadvantages, about which I will say more.

Why the interest?

Gas

Western Australia is a very large exporter of liquefied natural gas (LNG) gas supplying 10 per cent of world trade. Plans are for a doubling of production to 20 million tonnes per year by year 2003. Since deregulation, very competitive gas prices of around US$1.30 per gigajoule are achievable in the home market. That has helped BHP’s Direct Reduce Iron project and now provides key interest in a possible petrochemical project.

It will be based on ethane but whose potential immediate supply is limited. Current exports of LNG are tied to performance contracts, so it cannot be extracted from current contracted exports without penalties.

The petrochemical project would be located at the head of the Dampier to Bunbury gas line. By end of year, a second line will convey gas for BHP’s Direct Reduced Iron project at Port Hedland. This project due to commence in 1999, will require 140 terajoules of gas per day (1 million tonnes per year). The two lines will therefore convey gas containing around 500 000 tpa of ethane. It should be noted that extracting all the contained ethane is more costly than extracting up to two-thirds as it avoids not only lower temperatures, but also the removal of the co-produced carbon dioxide gas.

Salt

W.A. is a very competitive exporter of salt suitable for the chloralkali operations with production facilities alongside the gas exporting installation. At $7 to $10 per tonne freight advantage over Asia, it presents a useful saving of around $5 to $7 per ECU or 2 per cent on the caustic and chlorine chemical.

Caustic Market

Australia imports 1.1 million tonnes of caustic – two-thirds to Western Australia, so that nearly one-half of the world’s deep sea trade that is used in the production of alumina growing at 3 per cent per year. Australia therefore represents a "black hole" for the PPP’s production of caustic. However, the venture would still be 1500 kilometres by sea from the market to the south of Perth, and cabotage, the use of (more expensive) Australian shipping, remains an issue that will impact on competitiveness.

Chlorine deficit in Asia

Asia produces less chlorine than it needs, and their deficit is growing strongly with fast growing demand for PVC. Simply put, the region requires more chlorine than the co-produced caustic soda which creates an imbalance. Chloralkali production is expensive in the region through high power costs so that exports are generally opportunistic and at marginal costs.

There is currently a 1.2 million tonne per year chlorine deficit in Asia - that is projected to be 2 million tonnes by year 2003. The region is anticipated to import 6 million tonnes of vinyls of which some 80 per cent will be as the PVC precursors, EDC and VCM from the low cost centres in the Middle East and the USA, and perhaps, soon W.A.

The PVC trade balance is summarised in Figure 11 where EDC imports are presented as tonnes of PVC produced. The chlorine deficit is clear - it is large and represents another "black hole" for the PPP. `

 

Figure 11 PVC demand and the net total of imported vinyls (PVC, EDC and VCM) in 000's tonnes projected to year 2000 (EDC expressed as tonnes of PVC produced).

A potential investment in Western Australia would initially produce some 450 000 tonnes of chlorine as EDC or VCM. Even if in the unlikely event the local market were to be supplied by the project, some 75 per cent, or some 350 000 tonnes of chlorine, would be exported to Asia.

It is worth noting the project is predicated on supplying caustic soda with the chlorine produced essentially as a by-product. Given low anticipated power costs, it could supply the chlorine-dense EDC as low as $100 per tonne at times of high caustic prices. At this value, which is about that being negotiated today, the value of the chlorine is effectively negative - the supplier effectively paying for the chlorine to be taken.

The potential chlorine values from different regions is shown in Figure 12.

Figure 12 Power costs and potential minimum effective chlorine prices (calculated from EDC) by region.

Clearly, this potential for low chlorine prices would place pressure on marginal producers in Asia and of course reinforce the trend to importing chlorine. What about Australia’s market for chlorine?

Australia's chlorine market

Australia’s caustic and chlorine production is less than 100 000 tonnes dedicated to chlorine, notably for titanium dioxide and water sterilisation. Chlorine chemicals, including VCM and EDC, are no longer produced and so all our PVC is derived from imported chlorine.

Australia imports about 200 000 tonnes of VCM per year through Geelong, Victoria from where it road freighted to two plants at Altona and Laverton. These are owned by the Australian Vinyls Corporation (AVC) to polymerise the VCM to PVC resin. Orica has not only signalled its intention to sell its interest in AVC, in default of being able to find an overseas buyer, AVC will now be floated on the Australian market.

Clearly, even if Australian demand for imported chlorine were met by the PPP, it would still only represent 100 000 tonnes per year, leaving three-quarters of production to be exported. In any event, Victoria, as the main market, is also 3 500 kilometres away. The PPP will therefore be focused on Asia for the sale of its chlorine chemical.

Competitiveness

The big question of course is, will the PPP happen - is it competitive? After all, a venturer could instead look at placing it where there is a market for chlorine - namely Asia where important incentives are provided by the Government. Competitive bidding can obviously be anticipated.

The combined competitive advantage over an alternative Asian location is summarised in Figure 13.

Figure 13 The sources of advantage and disadvantage in production costs estimated on a 500 000 tonne chloralkali unit measured as A$ per ECU. An ECU could be taken as A$400.

It uses the Electrochemical Unit (ECU) as the benchmark which is the combined cost of producing 1.0 tonnes of chlorine and 1.1 tonnes of caustic. It shows how the gas provides a gas price sourced advantage and freight saving for caustic which offset by the cost of moving the chlorine to Asian markets and higher cost of construction and infrastructure. There is therefore a small net advantage for locating in W.A. of around $20 per ECU, say 5 per cent on production cost.

However, Australia does not offer tax concessions for new investment as available in competing regions, and the construction and infrastructure cost penalties are contentious. On that point it is worth noting that nearby at Port Hedland, BHP has commenced the construction of a $2 billion Direct Reduced Iron plant that has incurred a well publicised construction cost blow out of around 50 per cent. Such experiences could be perceived as capable of repetition for other ventures.

Therefore, without the taxation and other incentives provided in competing regions, any assistance provided by our Governments would be an important influence in its prospects for establishment.

Venturers

In June 1998, the Government of Western Australia announced the successful proponents of the PPP as a joint venture of Dow Chemical and Shell who will have the right to present a formal development proposal for the project. To begin construction in year 2000, the project would begin production by 2003 of:
bullet450 000 tpa of ethylene production jointly owned and operated;
bullet400 000 tpa monoethylene glycol by Shell;
bullet690 000 tpa of EDC by Dow;
bullet500 000 tpa of caustic soda by Dow.
Why Government support?

Two Australian producers of ammonia in Australia, Wesfarmers and Orica, have expressed interest in producing ammonia (and ammonium nitrate and urea) plants. It is useful to note that the PPP will require oxygen extracted from air for the production of EDC via oxychlorination. Nitrogen is of course co-produced which instead of being vented, could be applied to the production of ammonia with obvious cost benefits. Ammonia too can be used to produce ammonium nitrate for which there is fast growing demand in resource development. Further, the ammonia could stimulate the production of soda ash, or sodium carbonate, that too would use the cheap salt and gas. The production of other organic chemicals, including MTBE, could be promoted from synergistic gains. In other words, the PPP could stimulate Australia’s first export-focussed integrated petchem centre. I would like to add that the facility will require a competitive scale ethylene project. Even at the scale proposed it is now at the low end and so it would not surprise me to see other venturers involved to produce polyethylene or some other application - even acrylonitrile. Exporting ethylene glycol as proposed is like exporting the scarce ethane diluted with water.

That said, the project will stand or fall based only by the previously described core products. These other projects are bonuses, the externalities, that benefits us Australians and are not really bankable by the current venturers. Here is why the governments should step in to evaluate the public benefits of assistance - and that is coming from me as an economic rationalist. Let me give you one example.

Singapore has become the most efficient petrochemical producer in the region - this without raw materials, high cost land and no import tariffs. To illustrate their attitude to investment, some A$7 billion is being spent by the Singapore Government through its Economic Development Board. It is being applied to consolidate seven islands for the Jurong Island storage and transhipment facility with jointly owned utilities. Singapore has a vision and demonstrably providing amazing returns to the country. It is not alone as Malaysia too is spending big to encourage investment. Australia will benefit enormously from the success of the PPP and on current indications, needs government help. Other nucleus sites exist in Australia.

There is now a lot of interest in Australia and I have personally addressed four international conferences in the past year alone. The PPP will be extremely important - more than recognised by most Australians.

Let me say it again. Australia's chemical industry has been in decline since the mid 1970s. It has attempted several times to establish world class export-oriented petrochemica1 projects and failed. The success of the PPP will provide a very important signal to the world about Australia's competitiveness. Many projects and externalities will flow from it.

Previous protectionist policies, based on import tariffs, in the end only served to stymie Australia’s manufacturing industry without promoting a redress of their "band aid" purpose. There is today a strong case along the Singapore experience, to help certain key nucleus activities that might include the Pilbara venture in Western Australia.

Some conclusions

Australia has indeed been the lucky country helped by commodities. However today our national debt has hit 35 per cent of GDP and we are clearly falling behind most developed countries. For years I have listened to hollow feel-good diatribes and platitudes from or to the chemical industry. The public on the other hand seemed more interested in often unjustified risks than the real benefits the chemical industry could provide.

I say the time has come to better promote ourselves to the public. There are indeed some exciting projects, such as WMC’s Queensland Phosphates project in particular and those titanium dioxide pigment projects that are straining at the reins. But they are only offsetting yesterday’s losses - they are not enough to guarantee the industry’s turnaround. There is so much potential in Australia!

I now ask how far does Australia have to slide before we get a real commitment and focus? Will it take another closure in Victoria to get some pro-active initiatives? I say now is the time to take some hard decisions that will shape our future

I placed my career with the chemical industry because I believe in it.

I could have simply talked about the opportunities in Asia or about some of the feasibility studies that I have been involved with so as to present a more traditional and more profitable face to ACTED Instead I have chosen to tackle a few of the many controversial issues because it is vital to understanding the background.

In that vein, I promoted this conference, though secularism nearly tripped it up. I thank AIC deeply for taking my word that Australia needed a Summit for our industry. They took a risk. There are gaps in the conference presentations and in its attendance, but at least the first steps forward have been taken. I am very grateful. I look forward to tomorrow’s panel session. I look forward to seeing some returns from that effort the speakers have taken to share with you.

I hope too for a national body. Investment today is far more complex with the environment and public safety involved as so clearly illustrated by that Coode Island inquiry in Victoria. The Commonwealth should promote an effective national body to oversee the interests of those participating in and contributing to the industry. My company was once retained by one federal agency to evaluate the potential impact of trade bans on chemicals that included those keys to our future. I would like to think that we were responsible, but who arbitrated that other than government?

As national Chair of Industrial Chemistry of the Royal Australian Chemical Institute, I can say that there are skilled people that are simply unaware of key issues and who could become party to promoting new industry and help focus tomorrow’s intellect. I hope to see the participation of others soon and that includes the Royal Australian Chemical Institute and the Institution of Chemical Engineers of Australia. To that end, I have started CIP in W.A. for the benefit of the whole industry.

For the moment we remain obsessed by income distribution issues such as the selling of our telecommunications, Wik, and an overdue tax reform. There is still an unhealthy undercurrent of secularism and I am concerned about the lack of resources in some agencies being topped up from less than objective sources.

Signalling today’s priorities, the letter "T" of that important federal agency DIST, that once stood for "Technology", now stands for "Tourism". Tourism is one of the lower per employee income earners for Australia, even if it is politically attractive from the gross numbers and values perspective. In contrast the chemical industry has one of the higher per employee value added activities in Australia - does the public know that, and what it means?

We need a shift in emphasis. We must sell ourselves more effectively to the Government, to climb higher on their priority list. We have much to contribute to the nation’s welfare. I do not mean necessarily in the sense of assistance, but to help establish an overdue effective vision for ourselves.

I have talked about the pain from the withdrawal of protectionism, and all too briefly the industry’s status today, and then jumped to just one venture which has been prematurely called a project. There are indeed exciting opportunities for Australia and some of the pieces to shape tomorrow are on the board. But is there the will to make it happen?

I do look forward to the next presentations and the concluding panel session in particular. Again, I hope I have made a small contribution and that any perceived negatives will be taken as promoting a clearer understanding of today.

I have a vision for tomorrow’s chemical industry and would like to be part of the move for its development. There are some obvious paths to follow.

Thank you.

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