Rising energy prices threaten Aussie steel manufacturers

Ross Greenwood speaks to BlueScope (ASX:BSL) CEO, Mark Vassella, about having been hit with a $17 million increase in their energy costs over this half-year and why it could very well bring Australian operations to a halt.

Introduction: Rising energy prices threaten Aussie steel manufacturers

Ross Greenwood:  Let’s now go to BlueScope Steel, Australia’s largest steelmaker. Today its net profit after tax for the first half of the year. It was $441 million that include the one-off benefit of $84 million.

Now, the other point also is to know, however, that if you take out a few bits and pieces of the Australian steel business, the underlying earnings before interest tax and the depreciation before interest and tax rather I should say was down $261.7 million. This was as a result of in particular higher energy prices.

Now, there are also issues in regards to volumes and export margins and so forth. Leave that aside. Now, on the other side, we’ve actually got a really solid result at the BlueScope’s US operations. Even so, there was not bad results coming out of China.  

Consider the Prime Minister Malcolm Turnbull has been with the President of the United States and lasted a while. They’ve talked about tax cuts and tax policies. Also, no doubt they would have been talking about tariffs.

Now, remember that in the United States, Donald Trump has promised to slap 24% tariffs on other nations steel which would include Australia’s. 10% on aluminium imports. Let’s now go to the recently appointed Chief Executive. These were his first results he handed in. Mark Vassella, he’s on the line right now. Many thanks for your time, Mark.

Interview with: Mark Vassella, CEO, BlueScope Steel

Mark Vassella:  Hi Ross. How are you?

Ross Greenwood:  Good. Thank you. In terms of your business in Australia, the energy prices they’ve applied– they’ve taken a bit of a toll. The earnings are strong. Clearly, that have taken an edge off them.

Mark Vassella:  Yes, the earnings are strong. We’re thrilled to have three ups now of more than $500 million. Lots of good work Ross by a lot of people. Energy costs are still an issue for us. We had about $17 million impact in this half for energy costs. Our energy costs have doubled in the last couple of years. We still need to solve the energy cost problem in Australia to make sure that manufacturing jobs and manufacturing businesses can remain in the country.

Ross Greenwood:  You’re saying your energy costs have doubled in the past couple of years. They’re up by $17 million over the course of these six months as compared with the same six months last year. Tell me, what are the– which area is it basically raw electricity you’re getting the big increases from?

Mark Vassella:  We say both, Ross. We say electricity and we say gas. Of course, gas-fired electricity drives some of the electricity cost increase. We’ve been working with the government here. The government has put in place initiatives with gas reservations to try and assist. We’ve started to see prices come off which is a good thing. I must call out unfortunately, we have a steel mill in North America. Now, North America energy costs are about a third of what we pay in Australia.

Ross Greenwood:  A third. That gives people some source of comparison. The other point also is the government’s put in place an energy guarantee. In other words, it’s making certain that there is electricity at all times for big users such as BlueScope. Because the last thing you could ever have is to not have electricity at the peak periods when you’re smelting because you can’t have that electricity basically cool on the pot, can you?

Mark Vassella:  Ross, we’re a 24/7 business. Unfortunately, if it’s cloudy or if the wind doesn’t blow and there’s no renewables, that’s a problem for us. We believe in the renewable story. We think it’s a fantastic story. We think we are heading in the right direction.

There’s a transition period here that we need to go through to ensure that businesses that need reliable and affordable energy can have it whilst we make that transition. A renewable future from our point of view is a fantastic outcome. The technology and the transition we need to manage through would drop jobs and businesses offshore.

Ross Greenwood:  Okay. We’ve spoken on this program a number of times to the Head of Australian Energy Market Operators no doubt you would have about some of the systems they’ve got in place to be able to have companies are cooperate with them to have their electricity supplies withdrawn at peak times particularly very hot summers days are the obvious times.

Have you participated in that given that you’re a 24/7 business?

Mark Vassella:  We’ve contributed to that in other states. For us so, we’ve contributed to that in Victoria. Unfortunately, with the blast the furnace you’re unable to turn the blast furnace off for peak demand. It’s [unintelligible 00:04:32] that requires energy 24/7. We don’t have that flexibility. The energy and the prices that the Prime Minister and the government have put forward, we think it’s a step in the right direction. The devil is in the detail. We haven’t seen all of the specifics about it yet. We think a move towards more reliability and more affordable energy is good for the Australian economy.

Ross Greenwood:  Given the fact that your business right now has paid off significant amount of debt over the past three years. Given the fact that your business also has the ability to take on very new projects. You’ve done so with the North Star business in the United States. You’ve obviously, expanded in the past into China. With the money that you’ve got, your shareholder’s money right now, if you’re seeking to expand right now and you’d have to take into account energy prices and the taxes that your company would otherwise pay, would you be more likely to invest that capital into the United States or in Australia?

Mark Vassella:  Well, that’s not an easy question to answer. I think at the very base level if you think about the cost of doing business, then those markets that have a lower cost of business are where the investment funds flow. We have a strong position in the Australian market that we are very proud of and that we’ve developed over many years. The cost of doing business and certainly economies like we see in the US right where they’re lowering taxes and they have affordable energy are very attractive in terms of investment for companies.

Ross Greenwood:  It would be more attractive to go and invest there or to build there given the fact that they have 24% tariff on steel if you were to try to export from Australia into the United States. It would obviously be a lot cheaper if those tariffs come in to actually make it in the United States itself.

Mark Vassella:  Yes, that’s correct. We have a business in the US as you’re aware Ross. We’ve got about 3,000 people up there that work as BlueScope employees in the United States. United States workers. We export some material there but we then transform that product and make it into what we know as. We value add.

From our perspective, operating in the US, yes, if tariffs come in, that will increase our cost. We’ve pitched to the American President and to the government up there that we’re actually not an exporter. We’re a local manufacturer and contributed to the US economy.

Ross Greenwood:  Tell you what. Mark Vassella, the Chief Executive of BlueScope. That is a genuine lesson into why taxes in Australia do count. Company taxes. The fact is, if ours are too high as compared with the United States, investment goes potentially elsewhere. Secondly, also you then get a fundamental difference in investment and jobs.

That’s the absolute key. Mark Vassella, I appreciate your time here on the program this evening.


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Interviewed  Paul Bloxham, Chief Economist, HSBC titled ” Economic growth is up, but what does that mean for ordinary Australians? .”

Interviewed  Bill Evans, Chief Economist, Westpac titled ” Why rates won’t move for two years .”

Interviewed  Andrew Dillon, CEO, Energy Networks Australia titled ” Has the Government introduced an emissions trading scheme? .”

Interviewed  Michaelia Cash, Minister,Employment titled ” Unemployment at a four-year low but what about wages? .”

Interviewed  Mark Bernhard, CEO, GM Holden Australia titled ” Holden: The End of an Era .”

Interviewed  Rod Sims, Chairman, ACCC titled ” What gives the right to those with market power to profit? .”

Has the housing boom come to an end? .

Image source: 2GB 

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