WSJ:Australian Steelmakers Fear Carbon Tax, Currency
By CYNTHIA KOONS
SYDNEY—Weighed down by the strong Australian dollar, cheaper overseas competition and a new proposed tax on carbon emissions, steelmaking in Australia faces an uncertain future.
The closure of Hills Holdings Ltd.'s pipe and tube manufacturing facilities, expected by the end of September, is the latest sign that the Pacific nation's 31.7 billion Australian dollar (US$33.5 billion) steelmaking industry is in trouble. The company says it is no longer economically viable to make steel pipes and tubes—used to transport oil, gas and water—in Australia and instead plans to import the products.
"We've seen a growing trend toward importing finished pipe coming out of China, Korea," said Graham Twartz, Hills' managing director, in a recent interview. Mr. Twartz said the strong Australian dollar and weak domestic construction market have added to the company's woes.
Australian heavy industry is struggling to cope with the strength of the nation's currency trading near 30-year highs, which makes imports cheaper. Benefiting from lower-cost labor and abundant demand, India and China have ramped up steelmaking, their combined output more than quadrupling over the last decade as production from traditional steelmakers like the U.K. has fallen.
Steel production in Australia has fluctuated over the last decade, recovering last year to 7.3 million metric tons after falling about 33% the previous year from its 10-year peak, according to World Steel data. The industry here traces its roots back to the turn of the last century, when steelworks grew to supply mines. Among the early investors was Broken Hill Proprietary Company Ltd., which commissioned its first steelmaking plant at the Port of Newcastle in 1915. The company now trades as BHP Billiton and is the world's largest miner.
Adding to the problems faced by local steelmakers is a plan to tax 1,000 of the largest carbon producers from July 2012 and introduce an emissions-trading system three to five years later that could punish the energy-intensive industry. Steelmakers are concerned about the plan, with the chairman of BlueScope Steel Ltd. warning it could make smelting no longer viable in Australia. The government says it will compensate industries most affected. A spokesman for the government declined to provide specifics of the plan.
"I don't think I've seen a tougher environment than the one steelmakers are currently operating in," said James Bruce, portfolio manager at leading Australian funds management firm Perpetual. Mr. Bruce has covered both BlueScope and OneSteel Ltd. for about nine years.
"The pressures the industry is under are enormous and that's putting a significant strain on the businesses. That's before you even consider any implications from the carbon tax," he said.
Hills isn't alone among struggling steel companies. OneSteel, the country's largest steelmaker by market value, cut its profit guidance by 14% in May, in part due to the rapid appreciation of the Australian dollar. Melbourne-based BlueScope downgraded its guidance to say it expects to report a small net loss in its second half.
At the time of the group's first-half results in February, BlueScope Chief Executive Paul O'Malley said profits would improve by A$200 million if the Australian dollar fell back to 80 U.S. cents, the level it hovered around before the start of the resource boom. The Australian dollar is currently trading at close to US$1.06.
OneSteel is down nearly 30% since the start of the year, BlueScope is down around 46% and Hills has lost nearly 34% of its value. The broader Australian share market index is down just 3.3% over the same period.
