Surging gas prices ‘risk overseas exodus’ of heavy industry: Sims

Surging gas prices could force heavy industry to relocate overseas as manufacturers wilt under energy costs.

ACCC chairman Rod Sims says rapid rises in the cost of energy had made Australia’s east coast an “increasingly unattractive proposition for investment”. Picture: News Corp

Heavy industry on Australia’s east coast will be forced to shut and relocate operations to cheaper destinations overseas as big manufacturers wilt under the strain of persistently high gas prices, the competition regulator has warned.

Australian Competition & Consumer Commission chairman Rod Sims told an energy conference in Sydney yesterday the recent rapid escalation in the cost of energy had made the east coast an “increasingly unattractive proposition for investment”.

“Commercial and industrial gas users have been telling us for some time that, at current wholesale gas prices, their operations are not sustainable in the medium to longer term. They are increasingly likely to relocate from the east coast or wind up their operations,’’ Mr Sims said.

The ACCC and major commercial users, including Orica, Dow Chemical and Brickworks, had sounded the alarm on soaring energy costs as companies struggled to compete with international rivals enjoying cheaper prices.

Orica revealed it was weighing the future of its Newcastle ammonia plant, with up to 300 jobs at risk, as the high price of gas rendered its Kooragang ­Island facility uncompetitive.

A raft of other at-risk producers may also be pressured into abandoning local operations after years of absorbing gas bills and power bills up to four times the level of those in other countries, the ACCC warned.

Users on the east coast now pay more than $12 per gigajoule of gas, up to four times historical levels, as a squeeze on supplies and the linkage of international LNG pricing to the domestic market hits home.

Mr Sims’ comments yesterday followed his 2016 warning that high gas prices were causing big industrial users to have a “particularly difficult time”.

Queensland, the home of three LNG export plants, pays more for its residential gas supplies than any US state, while only Hawaii has higher gas tariffs than NSW, South Australia and Tasmania, according to Dow Chemical.

Fertiliser and explosives marker Incitec Pivot and the ­nation’s largest petrochemicals producer, Qenos, have raised concerns in recent months over their ability to keep plants running because of energy costs.

Orica said it was considering importing ammonia rather than producing its own, with a decision likely in the next few years when new investment in the project was required.

Production sites such as Kooragang typically need major maintenance every three to five years, triggering a decision for Orica’s board on whether it continued to invest in the facility’s long-term future. Orica said the Newcastle plant was in the last quartile in terms of operational ­efficiency compared with the broader global industry due to high gas prices.

“If you are going to put a significant amount of sustaining capital back in, which is more than $100 million, we will look at whether it’s better to import ­ammonia instead,” Orica CEO Alberto Calderon said. “Because gas is half the cost of ammonia, currently its cheaper to import ammonia than to produce it.”

The decision will partly hinge on gas tenders Orica currently has in the market for new supplies.

Tension between buyers and producers erupted yesterday after Mr Sims said some industry suppliers were showing “almost contempt” for domestic customers through brazen marketing practices and not properly engaging in negotiations.

Orica says it holds concerns about the trend within the east coast market for across-the-board LNG pricing regardless of whether producers are exporting gas.

“A particularly unwelcome ­development has been the pricing behaviour of traditional non-coal-seam gas suppliers who, without the high cost exposures created by owning LNG assets, have begun to price their gas at the same levels as their LNG counterparts,” Mr Calderon said.

The linkage between east coast and international LNG prices took shape after Queensland’s three export projects started shipping local gas to customers in Asia over the past few years.

“They promised this current crisis would not happen,” Mr Sims said yesterday in reference to Queensland’s LNG export industry. Domestic gas prices soared to more than $20 a gigajoule in 2017 and still fetch above $12 a gigajoule. Historical levels were $3 to $4 a gigajoule.

Orica called for the federal government to ensure the domestic gas market was adequately supplied, with excess supplies then being exported to buyers in Asia. “When the market reaches this point, domestic gas prices would converge to costs of extraction plus a fair return plus transportation costs,” Mr Calderon said. “Today’s estimates indicate a sub-$6 cost for proved and probable underdeveloped reserves, and hence Sydney prices should converge somewhere between $8 and $9.”

LNG exporters escaped the threat of government intervention last year after signalling the extension of a deal to offer uncontracted gas for domestic use before export and agreeing to make gas available at peak demand periods for the power grid.

Gas players recommitted to the Australian Domestic Gas ­Security Mechanism, which gives the government power to limit gas exports if it anticipates a domestic shortfall the following year.

Labor has also pledged to introduce a separate gas export price trigger that would curb supplies of LNG exports, raising fears among producers about the risk of retrospective moves that could disrupt Australia’s second-biggest export earner.

Orica said government intervention may be justified given the impact of LNG exports on local industry. “Whether fair or not, this intervention demonstrates that the social licence to operate of the LNG exporters has been diminished as the broader community becomes aware that the promise of an LNG export-led economic recovery comes with a very high price tag in the form of a much smaller, less diverse local industry base.”

Dow Chemical warned yesterday the lack of a national energy policy was slowing Australia’s economic growth as high power and gas bills forced big business to shut operations or pass the costs on to struggling households.