Chemistry, comparisons and complexity

Last week Chemistry Australia released research by ACIL Allen, counting the industry’s economic contribution and adding to the conversation around Australia’s gas export boom and the effect on east coast prices.

According to the report, the chemicals sector supports 212,000 full-time equivalent roles, and contributes $37.7 billion.

The amount of value added per petajoule used was calculated as 33 times higher than the LNG industry, and created 80 times more employment. This left the Australia Petroleum Production & Exploration Association unimpressed, calling the comparison “not relevant to what needs to be a sensible and focused debate” on the way gas is used.

The federal government has announced that it will examine responses to soaring east coast prices, such as a possible gas reservation policy, though won’t make any announcements until February next year or later. 

For its part, the chemicals group recommends solutions including, “Ensuring domestic gas prices do not incorporate a premium equivalent to the capital and financing costs of LNG export infrastructure; continuing reforms to address the concentration of market power; a ‘use-it-or-lose-it’ mandatory development regime; Reforms to increase transparency of gas price and contract terms for consumers.”

Below is an interview with Samantha Read, Chemistry Australia’s CEO, about the new Chemical Sector Economic Contribution Analysis report, the effects of high gas prices, and the importance of economic complexity. 

@AuManufacturing: I’d like to know what drove the study. Was it time for a stock-take on what your industry contributes? Was it because you saw that it’d be a good way to inform the next government and something you’d had planned for that reason some months ago? 

Samantha Read: Just to give you an understanding, five or six years ago we developed a strategic industry roadmap. So that was the last time we had had external assistance to develop an understanding of the contribution of the sector. So we thought it was timely to invest in that work again and understand, using the latest information available from the ABS, the contribution that the chemistry industry makes to Australia today. And on top of that, the piece of information we really wanted to share, that we don’t believe has been done in Australia, is to look at the value-add of our industry to gas.

It was a piece of work to inform, and to help us in our discussions with government and others to talk about the important contribution that the industry makes. A lot of people don’t understand that our industry uses gas in two ways: in manufacturing, certainly an energy source, which many manufacturing businesses do, but we also use it as a feedstock, as an input into our process. A bit like iron ore is an import into the steel making process, we use gas as an input to transform that into a myriad of products that are used in the economy today.

@AuManufacturing: And you’re unique in doing so.

Samantha Read: We are unique in doing that, yes.

@AuManufacturing: I saw you got a response from the Australian Petroleum Production and Exploration Association. Of course they have disagreements with you and of course that’s fine. I wanted to get your response to their response, basically. Is it fair of them to describe you guys as undertaking an “us versus them” exercise and as making false comparisons? What do you have to say?

Samantha Read: I think the important thing is that our report set out to talk about the value of our sector and what we add to Australian gas. And we’ve certainly done that, and looked at the contribution that our sector makes. There’s a significant amount at stake if we’re not able to get the east coast gas market right. I think the important take-out of this report is that Australia can’t afford to lose investment in the chemistry industry, and certainly we all lose, including suppliers, if major manufacturers decide to leave Australia. So, I think that where we do strongly agree with APPEA is that there is an urgent need to lift the restrictions on exploration for new gas supplies.

@AuManufacturing: We don’t want to dwell too much on on “Chemistry Australia versus APPEA” or however someone might choose to characterise it, but did you set out to be provocative? Did you expect that the oil and gas sector would take issue with some of your conclusions?

“I don’t think anyone set out to invest in LNG trains in Queensland with an intention that it disadvantage Australian manufacturing.”
(Picture: chemistryaustralia.org.au)

Samantha Read: Look, I think we didn’t know what to expect in terms of the outcomes of the analysis, the independent analysis that ACIL Allen was going to do. The fact that the contribution of the industry is significantly higher when you look at what we add to a petajoule of gas, we probably suspected that that would be the case, but we didn’t understand the magnitude. I think that it’s been an important contribution to the discussion around what our future gas policy needs to be.

@AuManufacturing: Your group, as PACIA at the time, put out research back in 2012 warning that there could be price pressures on gas if we don’t act, and others in the years since have said the same thing. Why do you think it’s taken so long for policymakers to basically pay attention to what you’ve been saying?

Samantha Read: That’s a good question. I think part of it is due to the fact that it’s such a complex issue and it’s just not a quick and an easy fix. I don’t think anyone set out to invest in LNG trains in Queensland with an intention that it disadvantage Australian manufacturing. I actually think the opposite was the expectation, but we have seen circumstances play out. There was discussion around at the time that they might be temporary increases, but I think over the last few years as contracts have been renegotiated that we’ve seen there is clearly a permanent shift in the price of gas in the east coast gas market and, it is a difficult issue to address – particularly in the short term. In the long term we’ve been calling for more supply, more competition and greater transparency in the market and I think the first one of those points is that to bring on more supply, as you would understand, will take time. I mean it could be a five- to ten-year process. You can’t fix this issue quickly.

Then the next question is, ‘What do you do in the short term to ensure that manufacturers don’t make decisions that are irreversible in terms of their long term investments in Australia?’ And if manufacturers leave they won’t come back. So we have a short term issue and we have a long-term issue. And I think that’s what government is grappling with at the moment, in what can be done in both of those areas and particularly in the short-term. Certainly we welcome the intervention by the federal government a few years ago to bring in the Australian domestic gas security mechanism, because there were concerns about security of supply. And at the time, I’d have to go back, and I think there’s a chart in the report that you might be able to look at that shows a significant spike in the gas price, and the intervention did help to bring that down. But what we’re seeing today is that prices are now three times higher than they were. So we’ve been concerned about that, because that’s not sustainable. And this is the first phase of the report, we have another phase coming out, hopefully in the next month or two, which we’ll look at the price sensitivity for different parts of the industry. And this is the important information to feed into government so that there’s an understanding about the impact if we can’t address pricing on the East coast.

@AuManufacturing: You’ve mentioned supply, competition and transparency, and I’m sure there’s much else that could be considered, given it’s such a complex issue. Can you expand on the importance of transparency?

Samantha Read: I think that’s where the ACCC has been valuable in the new information that they’re providing to the market, and we’re certainly very pleased as part of the recent government announcements that the ACCCs role in looking at the gas market has been extended to 2025. So that’s very helpful. Certainly just allowing users of gas to have a better understanding of pricing and what’s in the market. But we can certainly come back if you need more examples on that.

@AuManufacturing: I wanted to ask about economic complexity, because I think it’s an important issue and one that we really don’t talk about very much in Australia, and it seems to come up fairly regularly in your media and I think that’s excellent. We seem to rate pretty poorly – I had a quick look at the Harvard Atlas of Economic Complexity rankings and 93 of 133 is not a good place to be if you want to prosper.

Samantha Read: And if you look at how far we’ve dropped in the last 20 years, it’s pretty alarming. I’m not an economist, I’m an engineer, by background, so don’t take me literally on this [laughs] but I think my understanding of that complexity is that because we invest such vast sums in resources, to maintain our ranking, we have to be investing as much in manufacturing. But I guess what it’s showing is that the gap is increasing. And I think importantly from that study, or I was interested in is that it says, I think on the website that it’s actually a very good predictor of a country’s future economic growth prospects, and that’s what’s concerning to me. Which is why I want to make sure people understand the outcomes of our study, because certainly we are one of the industries that helps to add the complexity in Australia, and we don’t want to become collateral damage because of the gas crisis.

I’m also quite passionate about it because it is critical to provide jobs but also diverse opportunities throughout the economy in Australia, and provide that opportunity for growth. I think it also builds resilience in our economy to other global shocks that might come along.

@AuManufacturing: I think so too. And I’m not an economist myself, but I’ve read that if there’s a random entrepreneurial event and it requires a certain amount of smart people to progress, then there’s a better chance of developing where that expertise is available. Otherwise the enterprise will go somewhere else. So you lose opportunities by not having a cluster of capable people and capable industry able to realise an idea and develop it.

Samantha Read: That’s right. And I think so often we’re focussed on today, that we’re not thinking about those lost opportunities and what we won’t be able to do as a country and what opportunities we won’t be able to participate in the future without those skills.

@AuManufacturing: Lastly, I wanted to get a comment from you regarding skills. What’s the situation for the chemistry industry? Are you as concerned about talent availability as the rest of Australian manufacturing seems to be?

Samantha Read: Certainly our industry, as all industries in Australia, needs to continually update the skills of our workforce, and I think more broadly, we need to increase investment in STEM literacy and education for all of our students. We’re doing quite a lot in the sphere of work with collaborating with universities and the CSIRO, and we’re involved in a couple of programs that you may or may not be aware of. We have involvement in an ARC Industry Transformation Training Centre, and that’s with Melbourne University, University of New South Wales and Swinburne is also involved. And as part of that we’re working to develop an industrial master’s program to better prepare students coming in and wanting to work in the industry. We also have a program at Monash University, which is a PhD in industry program and that’s been quite successful. That has just been re-funded by companies for a second round, so that’s important as well.

I think one of the other things of interest that we have also talked about is I think there’s a need to support the chemical industries, and probably other sectors, in investment in tertiary programs for regulatory science. And I think that’s a great opportunity for Australia, because there’s a huge demand in Asia for regulatory science skills. And I think we have an opportunity to develop programs where we could be providing services or providing students to support not only Australia but countries in that region.

Featured picture: UNSW