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  • Writer's pictureEdwin and George

A load of hot air? South Australia’s Heavy Industries – and the Cloud on the Horizon...

Manufacturing and defence are two areas where EGM has built expertise in the last two-years as demonstrated by the appointment of Alex Jeffries to further expand our capability in this area.

Manufacturing has always been key to the South Australian economy even though it hasn’t had a smooth ride. Defence is the recent success story; particularly with the news about the award of the BAE contract to build warships in Adelaide.

(On a related note, we were delighted to hear that the new Australian Space Agency will be established at the former Adelaide hospital site. The other states are unhappy with the decision, but the links with defence make the choice a good one. None of the EGM team have previously recruited astronauts but we have no doubt that our talented team will find some high-flyers should the need arise!).

There is one cloud on the horizon for heavy industries as highlighted by a report published this week.

The report by the US Studies Centre in Sydney, is called ‘It doesn’t have to be this way: Australia’s Energy Crisis, America’s Energy Surplus.’ It shows the massive problems facing industry due to increasing energy prices and supply issues.

Even though Australia has abundant energy reserves, domestic businesses pay substantially more than their American counterparts.

Here are some facts from the report:

  • South Australian businesses pay more for their energy than in 48 USA states.

  • Indeed, Queensland energy prices are more expensive than any USA state.

  • A Melbourne based manufacturer pays 177% more for energy than 10-years ago compared to a New York based business which pays 47% more.

The increasing cost of energy in Australia is giving large manufacturers a huge problem. With relatively high labour costs baked into the Australian way of life, having another key input rising in price is making it hard to be competitive.

For example, manufacturers need large amounts of gas to make their products. Approximately one in four Australian manufacturing workers is employed in a heavily gas reliant company. Gas prices are key because these companies cannot simply substitute some other ingredient.

And here’s the problem: Australia is facing gas shortages in its eastern states, leading to rising prices and potential lost manufacturing production.

It’s quite incredible that this should be happening. Last month Australia overtook Qatar to become the world’s largest gas exporter (see ‘Financial Times’ 13th December 2018). Most of the natural gas, however, is in the west coast and it is easier to send it for export than to build pipelines to the other parts of Australia.

The country is in the odd position of exporting gas from the west while looking for imported gas for the east.

It’s serious stuff. The report highlights one company in Queensland (Incitec Pivot – a fertilizer manufacturer) that had to release 450 workers as gas was costing it $50m per year.

Last year Canberra legislated to limit gas exports when there are domestic shortages. So far this has not been used, but it could mean ditching exports to China, Japan or Korea to shore up domestic supply.

Security of energy supply at stable prices is something South Australian manufacturing businesses have not had for at least the last 3-years. East coast gas prices have doubled since 2015 and energy consultants are predicting major shortages from 2023.

The US Studies report concludes by saying ‘If Australia’s policies do not change, many Australian firms will be forced to either scale back production and employment and relocate to other states where energy is cheaper, move overseas or simply shut down. There are no other options.’

So, even though there is a lot to celebrate in South Australia for manufacturing and defence, a solution needs to be found quickly to this serious issue.

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