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.