Rising gas prices, if left unchecked, will have a devastating effect on Australia’s manufacturing industry. The good news is there are measures that can be taken to achieve both a growing LNG export industry and a diverse industry base. Innes Willox writes.
Ai Group along with five other industry associations has compiled the first comprehensive examination of the impact of rapidly escalating gas prices on the Australian economy.
The report presents detailed case studies on the impact on companies in sectors as diverse as aluminium, food and beverage, paper and galvanising to give real illustrations of how higher gas prices impact on manufacturing operations and jobs.
The report “Gas Market Transformations - Economic Consequences for the Manufacturing Sector” finds that under current policies and realistic gas price forecasts Australia’s manufacturing output will contract by $118 billion over the next seven years and 14,600 manufacturing jobs will be lost.
Despite benefitting from LNG gas exports, it is anticipated that Queensland’s economy will suffer the most severe decline in non-gas sectors, with a $60 billion contraction in manufacturing output and a $22 billion contraction in mining output in net present value terms by 2021.
New South Wales and Victoria will see serious declines in manufacturing, accumulating to around $24 billion and $23 billion respectively in net present value terms by 2021.
In general, transformations occurring on the East and West Coast gas markets will have the most adverse consequences for manufacturing businesses that:
- Use gas most intensively, and therefore incur significant increases in input costs.
- Are substantially trade-exposed, or face other market imperfections, which limit their ability to pass on increased input costs.
The impacts are the result of sharply higher gas prices as LNG exports ramp up, attracting domestic gas supplies into the higher priced export market and raising domestic gas prices to export-parity levels.
This new analysis certainly shines a spotlight on the urgent need for gas market reform to cushion the impact of higher gas prices already being felt across eastern Australia.
Manufacturers use a lot of gas - it’s clean and efficient, and it’s always been cheap. Tripling wholesale prices are set to shrink manufacturing significantly. We need urgent action by the States and the Commonwealth both to unblock new gas supply, and to reform a gas market that should be far more competitive and transparent.
One key step to expand the market includes through removing excessive regulatory barriers to new gas production, including by removing the Victorian fracking/CSG moratorium and the NSW CSG exclusion zones, by streamlining approvals processes while maintaining strong standards, and by harmonising regulation across all jurisdictions as much as possible.
To help with increasing the diversity of gas suppliers we would support the Productivity Commission (PC) to conduct a comprehensive review and cost benefit analysis of potential reform options relating to the eastern gas market, taking into account the rapid change in market dynamics and with the aim of increasing efficiency, transparency and competitiveness of the eastern gas market.
An abundance of energy should be a comparative advantage for Australia. Instead, the gas export boom runs the risk of adding significantly to the already heavy economic pressures on domestic manufacturing because of constraints on supply and the absence of a properly functioning domestic gas market.
Our objective is for Australia to achieve both a growing LNG export industry and a diverse industry base that includes a strong manufacturing sector. A more competitive and efficient domestic gas market, with increasing gas supplies and improved market information and transparency is a critical first step in addressing the impact of higher prices.
Also worth consideration is an Ai Group proposal of a national interest assessment before any future expansion of the gas export sector, to ensure we avoid a repeat or further deepening of the current mess.