Lost in translation: a manufacturing plan or a gas plan?

The Federal Government’s National COVID-19 Coordination Commission (NCCC) has been charged with providing advice on to how to minimise the impact of COVID-19 on jobs and business and guide the fastest recovery out of it.

The leaking of its first draft report on the manufacturing sector suggests something has been lost in translation. The future of Australia’s manufacturing sector appears to hinge on major interventions and investments in the domestic gas market.

While gas is one of a number of important inputs into manufacturing and other sectors of the economy, what is odd about the NCCC draft is how little it scopes the state of the existing manufacturing sector and its current and likely impact from the COVID-19 pandemic. According to its own terms of reference this might have been a useful place to start.

Manufacturing has been declining as a share of the Australian economy for the past 30 years and output and total employment (around 923,000 people or 7 per cent of national workforce) has plateaued for most of the 21st century.

Many Australian manufacturers have struggled to compete with goods from lower-cost economies while the resources boom has increased the value of the Australian dollar. The removal of 20th century tariffs have resulted in the decline of iconic sectors like cars, clothing and textiles and white goods.

Key sectors like steel and metals processing (aluminium) have declined with mill and smelter closures over the past two decades. The Portland aluminium smelter has already been rescued once by state and federal governments in 2017 as the industry no longer can access cheap bulk electricity provided by a 20th century strategic oversupply of coal fired generation.

To date the first and deepest economic shocks of the COVID-19 pandemic have been felt in the services sector, in particular tourism, hospitality and higher education, although this is likely to expand as the domestic and global recession deepens.

You might have thought these basic parameters would have framed the NCCC’s initial thinking on how to guide Australia’s important manufacturers through the worst of this looming economic shock.

Instead the NCCC’s advice centres on investment that creates “vibrant manufacturing ecosystems” and a re-set of vocational training, although its unclear how that will be implemented fast enough to ameliorate the immediate economic shock.

But the real focus of the report is on reforming the domestic gas market by governments subsidising new supplies and removing “green and red tape” regulatory barriers to new gas developments and expansion of pipeline infrastructure.

The single biggest barrier of this type is, of course, the Constitution. Energy policy is the responsibility of the states, not the Federal Government. The Morrison Government has already negotiated a deal with the NSW Government to lift the moratorium on new gas development in that state, and Victoria will lift its next year.

More pressing for gas markets is simply producing enough gas to avoid the looming supply crunch: with EnergyQuest calling for new import facilities to be on line by 2026 and the Gas Statement of Opportunities by AEMO flagging supply shortages on some winter days by as early as 2024.

As global analysts Rystad Energy pointed out in a recent review of the Australian gas market, low oil and gas prices only discourage investment in new gas development, with large sectors of Australia’s east coast gas supply uneconomic at current prices. 

Gas demand may soften with a weaker global economy but could also increase if some coal fired generators close earlier than currently forecast due to sustained soft demand. These are all material issues that inform the future of the Australian manufacturing sector and its response to the COVID-19 pandemic. Maybe they will be included in the final NCCC draft.