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Tuesday, March 19, 2013

Tony Abbott and protectionism

Leader of the opposition Tony Abbott in Australia has made a number of statements that reveal a desire to implement protectionist economic policies.

To remain competitive in the global market-place two Australian steel makers adopted different strategies. One was successful - (from Crikey, "How OneSteel stole the march on BlueScope", Glenn Dyer | Aug 22, 2011 1:06PM)
The contrast between the business strategies of the noisy, very political BlueScope and its smaller, quieter and better-run rival, OneSteel (the other half of the old BHP Steel), are illuminating.

Both companies were spun off when BHP Steel was broken up in 2000: BlueScope Steel stuck to its modern, export-oriented steel plant at Port Kembla in NSW and smaller processing operations here and in Asia and other countries. OneSteel all but avoided export markets, preferring to stick to the domestic steel products markets based around its Whyalla blast furnace and two electric arc furnaces.

But from 2004 the companies parted ways, BlueScope stuck to basic steel making and processing, while OneSteel fixed on a strategy that will see it having spent well over $2 billion from 2004 till the end of next year re-jigging its basic processes and plunging into the export markets for iron ore as well as high-grade steel products.

While the dollar was cheap, both old approaches were acceptable strategies. But the 2004 move by OneSteel to change its steel-making process and enter the iron ore export sector was a significant move and risky, coming before the first iron ore boom from 2006-07 onwards, OneSteel could see the financial futility of using high-quality iron ore in Australia when it could get more value for it from export markets.

At a then cost of $250 million (that later grew and grew), OneSteel spent four years switching its iron ore product feed at Whyalla from high-grade hematite to upgraded magnetite pellets and exporting the hematite into world markets. The move wasn’t without criticism from the investment classes who questioned the strategy, the cost and said the company should be giving money back to shareholders.
The result of BlueScope's business strategy was less successful -
It is the big point of difference with BlueScope, which has had no control over its raw materials and was caught by the surge in iron ore and coking coal costs. Looking back it should have geared up and both a coal mine or two to replicate the OneSteel strategy.

So it is instructive that as BlueScope was revealing 1000 job losses and a total financial loss for the June 30 year of $1.05 billion this morning, OneSteel was announcing a $346 million deal to double the size of its iron ore export business to 12 million tonnes by the end of 2012.

In his Address to the Australian Steel Convention 2011, Canberra, on Monday, 12 September 2011, Tony Abbott assumes that BlueScope is to be guaranteed raw materials at a discounted price protected from the price set in the global market place. 

In an answer to a recent question from a journalist (Doorstop Interview, Rockhampton, 28 February 2013) he makes the same assumption about the price at which natural gas is to be made available to Australian industry and power generators. 

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