Manufacturing: Australia’s forgotten industry

By Ross Elliott, cross-posted from The Pulse

Predictions of the demise of manufacturing in Australia as the economy slowly becomes more service oriented are increasingly widespread. The reason – we are told – has mostly been an uncompetitive labour cost structure. We just can’t make stuff as cheap and as quickly as they can in China, Vietnam or India.

But there are two problems with this. First, manufacturing is far from dead and remains our fifth largest employer: more than double the entire financial, insurance and property sector. The second is that it may no longer be labour costs but something else that could threaten the viability of our manufacturing sector.

That something is energy and the cost of it. Only 20 years ago or so, Australia enjoyed some of the cheapest energy costs in the developed world. Now they are among some of the highest and most worrying is that they are predicted to continue to escalate well beyond inflation. Some hawks are even suggesting prices may double within the decade.

Responding to this is going to mean much more than turning off a few domestic lights at night or switching to energy save mode in the office. A bit like the city kid who hasn’t seen a cow and doesn’t know this is where milk comes from, we city slickers can easily get detached from the bigger reality – and in terms of energy consumption in Australia, the reality is that domestic and commercial are not the major consumers.

Manufacturing – our fifth largest industry – consumes nearly a quarter of energy in the country: more than double the entire residential sector and more than the entire residential and commercial sectors combined. This graph from the Office of the Chief Economist spells it out:

Transport is the largest consumer of energy (chiefly fuel) while in manufacturing it is chiefly electricity. What produces electricity is mainly coal, although renewables are fast on the rise (subsidised as they are for the time being). The graph below courtesy Origin Energy data shows generation by energy source:

So here’s the problem. In public policy and media discussion, much of the debate over energy costs seems to revolve around domestic and perhaps also commercial considerations. The cost of cooling or heating the home, the cost of appliances, even the cost of leaving the TV on at the wall occupy our minds and our thinking and much of the policy debate in the daily media. The answers, we are told, rest in renewables and as a nation we seem happy to embrace them: roof top solar for example was adopted quickly (many of us due no doubt to a mix of environmental responsibility plus a desire to break free from the power companies). We seem content with policies which cast coal fired power as the enemy and renewables as our saviour, without much question on the wider economic impacts beyond “will I still be able to have the lights on and fridge running?”

Where is the national debate about how rapidly rising electricity costs may cripple our fifth largest employer in manufacturing? There are countless stories of significant innovation in manufacturing where even our high labour costs haven’t been the death blow we’ve been told. Away from the trendy inner city coffee shops, energy costs – more specifically the cost of electricity – are becoming a bigger and bigger concern for these businesses and enterprises involved in manufacturing.  It would be criminal in a public policy sense if our national energy policy was more finely tuned to the sensitivities of the inner urban greenie doing their bit for sustainability by growing some zucchini plants in a broccoli box on their balcony, while the industries that power one in four jobs are left out of the debate.

I am not full of hope. The recent Federal Budget announcement of an inland freight line from Melbourne to Brisbane (hoo-ray by the way!) met with a suggestion from The Green’s Sara Hanson-Young that the steel used should be Australian, and preferably from Whyalla. “”If you care about the steel industry, then make sure Government money is being spent on Australian steel and give those steelworkers in Whyalla actually something to smile about,” she said.

Well yes. Except for one thing. Making steel is massively energy hungry. To do so, you not only need loads and loads of reliable energy, but the cost of energy is critical. Increase that cost and making steel becomes uneconomic. Massively so. Plus, Whyalla is in South Australia. Their experiments with renewables and reliability to date have hardly been stellar. What do the likes of Sara Hanson-Young have in mind? A solar powered steel smelter?

The energy source that once powered energy hungry industries like steel manufacturing is coal. And coal is very much on the nose, especially with The Greens but also the wider community too. The logical connection between the cost of replacing coal with renewables and the cost and viability impact that will have not just on steel but right across the manufacturing spectrum, seems to rate little thought.

If we are to make this energy transition, we need to have a sensible debate about the impacts on industry and how they can handle that transition without suffering needless economic hardship. Otherwise, yet more might look at closing their Australian operations and head for more cost friendly markets. Letting that happen without at least trying to prevent it would be economically reckless in every sense of the word.

Comments

  1. If we are serious about being a country that does not live on the kindness of creditors and instead actually produces goods or services that our trading partners want we need to take immediate take action to slow and preferrably eliminate unproductive capital inflows.

    No more tolerating the bulldust that all capital inflows are ‘investment’ when the vast majority are NOTHING of the sort.

    Most of the capital inflows that inflate our exchange rate well above what our trade performance warrants are directed to nothing more than asset acquisition and punting on house prices.

    The moment you read the guff trotted out by the usual suspects – David Uren, George Megagenius, Gittins etc and you cannot find any discussion of the difference between productive and unproductive capital inflows, you can be sure that you are reading the work of a true believer in the nonsense that got us into this mess.

    1. No sales of government securities to foreigners unless the proceeds are clearly and directly being applied to expanding the productive capacity of the economy.

    2. No more taxpayer guaranteed wholesale borrowing offshore by our banking sector so they can offer cut price mortgages rates where the security is existing property

    3. No more mere transfer of titles to land or industrial assets to foreign buyers without a clear case being made for how that transfer will expand the productive capacity of the economy.

    https://pfh007.com/2017/04/09/foreign-debt-gittins-gets-it-wrong-again/

    https://pfh007.com/2016/04/30/oz-sell-out-watch-mr-morrison-gets-something-right/

    Less moronic energy policy would also be a good idea but that is not going to happen while ‘true believers’ prance around trying how to come up a with a scheme that does not offend their devotions to free trade purism.

    Exports of energy and natural resource should require an export license and those interested should bid for the privilege.

    We will decide what resource leave the country and auction the right to do so.

    • They are not into free trade/markets. Luxury showers and toilets are banned!

      We are allowed to buy cars with a 6.5L engine but not a toilet that flushes more than 6L!

      And they want to double the population – so at that point do they ban every new loo from flushing more than 2.25L?

      What madness. Get government out of our bathrooms.

      • Jacob,

        Flush more 6L? Is that a lot? Maybe you need to cut down on the wholefoods. 🙂

        But I agree keeping the pipes flowing is important or Ermo will be up your driveway before you know it.

    • Torchwood1979

      Whatever. All the expense involved in education and training to ensure a supply of quality engineers and technical tradespeople is too much like hard work. A five day RE agent course qualifies any school leaver to become by proxy a purveyor of foreign debt and it pays better and costs the government nothing to provide.

  2. Bit of a silly article. The vast majority of coal consumption is not coking coal but thermal coal. And why are we not recycling metal a lot more? There should be a $100 fine for putting aluminium cans in the rubbish bin. Aluminium production uses 10% of the electricity produced in Victoria.

    Why has the manufacturing industry not given money to politicians to deflate the real estate bubble?

    If a person on $18/hour could buy a house, there would be no need for pay rises!

    Why have the manufacturers and retailers not demanded that the electricity grid be unprivatised? Brickworks was happy to rant against the carbon tax and the offline retailers put out full page ads against online retailing.

    • “Why has the manufacturing industry not given money to politicians to deflate the real estate bubble?”

      Because it would be hopelessly outspent by the beneficiaries of past inflation. Political campaigning has the highest returns of all pseudo-investments, but only for the winners. For the rest, it’s money down the drain.

      • The retailers and factories can rant against privatised airports and privatised electricity grids. But Brickworks only ranted against the carbon tax and the retailers put out full page ads against online retailing.

        It is really strange! Brickworks gave money to Tony Abbott to abolish the carbon tax because Brickworks felt that the price of bricks will go up by 10%.

        What about all the other factories that use electricity?

    • The wedging of everything. Complete absence of awareness outside their own ambition. A nation cannot progress as a group of individuals and while that remains ‘our’ way, we will continue to retrace.

  3. boomengineeringMEMBER

    Just repaired a Macson lathe, they were made by McPhersons in Melbourne. Since the mid 1800’s, McPhersons used to make everything, mid 1900’s a lot of machines. If Australians could afford to buy this stuff for a hundred years ask why now does it have to be imported.

    • Yes boom! As per pfh
      Overvalued currency for 60 years
      All the distortions and FIRE economy that now suck the life-blood out of everything.

      I think it is important to realise this is 60 years in teh making. Failure to understand this means we keep coming up with solutions that are both instant and make matters worse.

  4. casewithscience

    In 1959, Manufacturing accounted for a quarter of GDP and employment. In the early post war, Australia was producing almost all specialist steel products for the British Empire east of Suez. The great benefit of which was a massive uptick in our R&D capacity. How did we stuff up our lead????

    • We killed it with an exchange rate inflated with capital inflows associated with selling off assets and claims on our future income.
      We decided eating the future was much easier and we had plenty of trade ‘partners’ who were willing to supply us with the interest accruing credit doing so required as they not only gained a claim on assets but they also depressed their own exchange rate.

      Ever wondered how Japan managed to maintain a large manufacturing base including lots off shore manufacturing well after they had recovered from WW2 and pulled well ahead?

      It was policy not the magic of the market.

      • yes exactly this – the mumbling moron glen stevens pretty much destroyed Australian manufacturing

      • it was a bit more complicated.Varoufakis gives a excellent explanation.

        However, powerhouses need ‘vital spaces’ – large markets around them capable of producing the demand for all the products that come off the production lines and which the German and the Japanese markets could simply never absorb. Thus the New Dealers had to answer the question: Where will demand come from for German and Japanese manufactures? In the case of Germany, the answer was: the rest of Europe – what we now know as the EU. In the case of Japan the original idea was to turn China into Japan’s vital space but when Mao wrecked that idea the United States did not hesitate to turn its own backyard into Japan’s vital space.

        https://www.yanisvaroufakis.eu/2014/08/29/why-is-europe-not-coming-together-in-response-to-the-euro-crisis/

      • Alby
        It was all done long before Glen! He just laid a thick layer of cream on top.

        First thing they did was back in about 1970 when they took “Current Account deficit” out of the common economic lexicon. It was replaced with “Capital Inflow” as per pfh’s opinion.
        Sometimes i wonder how far back this globalist BS idea started and who had so much damned influence as to pull this off way back that far!

      • Jake Gittes,

        Yep – Yanis’s book the Global Minotaur is an excellent read along with Richard Werner’s Prince of the Yen (this is a must read to understand post war Japan and why the BOJ has a lot to answer for).

        To a large extent the US was eager to bind Germany and Japan close during the cold war with the cost being born by the US middle and working classes as their jobs were sent offshore in exchange for capital inflows.

        Idiot Australia largely copied the US model of swapping local production and jobs for unproductive capital inflows but over looked that there is a big difference between being the issuer of the world reserve currency and being a global super power who can tell creditors to get nicked if needs be.

        This is an excellent read on the Central Bank ‘narrative’

        https://professorwerner.org/shifting-from-central-planning-to-a-decentralised-economy-do-we-need-central-banks/

    • “Shouldn’t the title be – Australia s non existent industry”
      Nah
      “Shouldn’t the title be – Australia s non sexist industry”
      That’s all we need to worry about now!

  5. I am not full of hope. The recent Federal Budget announcement of an inland freight line from Melbourne to Brisbane (hoo-ray by the way!) met with a suggestion from The Green’s Sara Hanson-Young that the steel used should be Australian, and preferably from Whyalla. “”If you care about the steel industry, then make sure Government money is being spent on Australian steel and give those steelworkers in Whyalla actually something to smile about,” she said.

    What Hanson-Young actually said originally was:

    “It would be highly irresponsible of the Turnbull government to turn their back on this great opportunity to secure thousands of jobs for regional Australia and give an economic boost to Port Kembla.

    Ironically Port Kembla is Bluescope’s steelworks, not Arrium’s Whyalla plant where they actually do make steel long products like rail sections. Bluescope produce flat products like coil and plate, not hot-rolled structurals!

    What’s disturbing is that even though she is a South Australian senator, she has no detailed understanding of the capabilities of the large manufacturers in her own state! What hope does the rest of Australia have?

    She really is the whole package isn’t she? Ugly and stupid!

    • Such is the problems of the pollies these days: they need to spend too much time in front of a mirror practicing keeping straight faces in public no matter how outrageous or silly their lines may be.

      Real situations on the ground? Bah

  6. reusachtigeMEMBER

    There is absolutely no need to make shit when you have an advanced economy like ours where the best and brightest are in property or banking as that’s where real modern growth comes from. Manufacturing is what poor pricks do.

    • That’s right – on top of that, our fiscal and taxation system is so advanced that simply trading beautifully looking houses back and forth will generate great income streams for the states and fund world class services. As they say, don’t fix it if it ain’t broken.

  7. Manufacturing jobs actually appear to be booming in SA unless I’ve misread. A tad unusual, you would think similar jobs would be booming in NSW and Vic.

    Strangely, they seemed to be largely part-time – when did manufacturing employ large numbers of part-timers?

    And why does the demand appear to be largely restricted to one state when several others have significant manufacturing as well?

    Seems a bit coincidental that demand for manufacturing jobs is booming this year in the state that was to suffer a very heavy blow due to the final demise of the car industry this year. Where is all this demand suddenly coming from? The auto workers themselves won’t appear in the unemployment statistics since they have taken redundancy packages and won;t be eligable for welfare for some time. What’s juicing the demand for SA manufacturing jobs? Government stimulus done on the quiet – after they realized what a monumentally stupid and politically suicidal outcome Abbot and Hockey achieved with the destruction of the auto industry?

    Intersting…..

  8. Education is the global differentiation that makes Manufacturing profitable, if our education is not significantly ahead of all our manufacturing rivals than profits will fall and we will be forced to compete in the commodity manufacturing space where there is no knowledge value add.
    That’s the basic problem, our manufacturing rivals are matching or exceeding our education level so our remaining manufacturing has become commoditized. Aussies can’t compete in this space so we are doomed unless we address the problem at the education level, unfortunately for the STEM education metrics that are required to produce high value manufacturing, we are significantly behind all our major rivals and continuing to fall fast.
    Bodes not well for the future irrespective of what exchange rate we ultimately settle at.