Steel industry agony can’t justify protectionism: Burgess

In the 2008 film Gran Torino, Clint Eastwood’s Korean-war-hardened protagonist scornfully asks a young local priest what the hell he knows about dying. Not much, admits the priest, “but I know a lot about living”.

At least a thousand Australian families are this week getting a harsh lesson in what the dying of an industry feels like, with Bluescope shedding 800 jobs at its Port Kembla blast furnace and another 200 at its hot-strip steel plant in Victoria’s Western Port.

Their pain will be shared by businesses serving their communities – a repeat of the experiences seen in the late 1980s and early 1990s as Australia restructured under the Hawke/Keating reforms to take its place in a more open global economy.

So that’s the dying bit. But what about living?

The government has so far announced a $30 million fund to assist workers make a transition to other industries, and to help new businesses to set up to employ them. That in itself is not a bad idea – both the Productivity Commission and Treasury believe that such transitional assistance is pretty much all governments can do when the unstoppable tide of structural adjustment is running.

It would be wise, therefore, for Labor to stop at that. Not that it will – it is coming under intense pressure from its Left faction and the ACTU to step in and ensure the ‘viability’ of manufacturing in Australia. In the case of the steel export business, that means keeping a virtual corpse on life-support, with the faint hope it can one day be revived.

Left faction convenor Doug Cameron told The Australian yesterday it was time for “the Gina Rineharts, the Clive Palmers, the Twiggy Forests, the BHPs, the Rio Tintos – to actually stop lining their wallets and start making an investment in manufacturing jobs in this country”.

ACTU president Ged Kearney issued a statement saying “unions also welcomed the government’s announcement of a new facility to allow BlueScope to bring forward up to $100 million of payments under the government’s Steel Transformation Plan. Unions want to ensure the long-term viability of our important manufacturing sector because it provides thousands of jobs and is a major contributor to our strong national economy.”

Both Cameron and Kearney operate close to the coal-face of industrial relations. They meet the families and they know the pain. But none of that can disguise the wishful thinking in these kinds of statements. Keeping manufacturing ‘strong’ is a very sound idea if the Australian economy is in some kind of unusual cyclical downturn – the costs of shutting down a plant only to reopen it a year or two later are huge.

But that is not what’s happening to Australian steel. There was much praise heaped on OneSteel yesterday for managing to diversify its business into iron ore – and hence control the cost of this booming commodity – and thus avoid the same fate as BlueScope.

Fair enough. But there are two sides to that argument.

On the one hand, iron ore and steel are natural hedges against each other – as ore prices rise and push up the dollar, Australian steel profits will fall as foreign steel becomes relatively cheaper. When, or if, iron ore prices fall, better prices will prevail for Australian steel.

So to that extent, OneSteel has been a smart cookie. But hidden in that latter scenario is the crux of the problem for steel – do we believe, as Treasury does, that the iron ore, coal and LNG boom will endure for decades, or do we think there’s a good chance of it moderating significantly sooner?

This is the call the government is attempting to make. It is effectively paying BlueScope not to shut down its No 6 blast furnace (leaving only two such facilities operating in Australia), but to put it into care-and-maintenance mode. The cost of such a move can only be justified if the commodity price boom is expected to substantially tail off soon – and very few economists actually believe that.

Indeed, it would take something like mass social unrest in both China and India – together home to about a third of humanity – to kill off long-term demand for our commodities. Nobody wants that.

So the government is being forced, for purely political reasons, to have it both ways – our “fundamentals are strong” argues Treasurer Wayne Swan, who then says a few days later that we need to keep our steel manufacturing industry on ice just in case they are not.

That’s one big step down a foolish path. The government is smoothing the cyclical woes of steel, when it knows full well there is nothing cyclical about it.

As if this wasn’t bad enough, it has taken an even more foolish step in bringing forward $100 million of the recently announced Steel Transformation Plan to assist BlueScope’s restructure. It is a move that reeks of protectionism, and is a fundamental misuse of carbon tax compensation – the money was, in theory, set aside to offset the carbon tax impost that BlueScope faces from July 2012

I put this yesterday to Andrew Stoler, former deputy director-general of the World Trade Organisation and now executive director of the University of Adelaide-based Institute for International Trade, who finds the plan pretty frightening from a global trade perspective – he described the bringing forward of the $100 million as “absolutely crazy”.

He commented: “How can somebody start paying a subsidy to offset something that doesn’t exist yet (the carbon tax)? The risk is that somebody somewhere else might feel aggrieved – it’s not illegal, but it’s a situation that could lead to countervailing duty action. China could launch that kind of action – in fact it’s one of the biggest users of countervailing actions and anti-dumping measures.”

To be fair, Stoler points out that such countervailing measures would most likely be specifically against the company receiving the subsidy – BlueScope, which is effectively abandoning its export operations anyway.

However, the message for the Gillard government is clear – further subsidies to keep what the ACTU calls a “major contributor to our strong national economy” must be handled with great care.

The more obvious objection is that all Australian taxpayers are chipping in for such subsidies, and there is a better return for all of us in spending such money on the living, not preserving the dying.

This article first appeared on Business Spectator.