An iron will needed for steel town to prosper anew

It was 1981 and Phil Rouse was a newly minted commerce and industrial relations graduate about to enter his cadetship at the sprawling BHP Steel plant at Port Kembla.

Then, as now, the steel industry was on its knees - hit by recession, world oversupply and competition, and crushed by outdated technology and the rising costs of a labour intensive industry.

During his cadetship, Rouse saw firsthand the massive structural changes that redefined the Australian steel industry. When he started, BHP had just over 20,500 employees at Port Kembla by 1984 it had shed 35 per cent of its workforce.

A short drive from what is now BlueScope's plant at Port Kembla is the Wollongong office of the Australian Workers Union. Wayne Phillips, a boilermaker by trade and a lifelong union official, was one of the 7000 laid off in the early 1980s. Within a few years he was offered his job back at Port Kembla as the steel industry rebuilt, but not before he and his fellow unemployed workers had stormed Parliament House in Canberra.

Within a year of the Hawke government coming to office in 1983, the Industry Minister, John Button, secured support for a steel development plan, a bounty system over five years that allowed local steel producers to retain between 80 and 90 per cent of the domestic market. The unions came on board, with undertakings on work practices and improved productivity. BHP committed itself to invest $800 million. Steel staggered to its feet, and by 1990 Port Kembla was producing 3.5 million tonnes and employing 9500 people.

But in the past year an oversupply of steel, overseas competition, a stubbornly high dollar and muted domestic demand from the construction sector have again brought steel to its knees.

BlueScope closed one of its two operational blast furnaces at Port Kembla and its hot strip mill operations at Western Port in Victoria as it quit the export market to save itself from fatal losses, halving its steelmaking capacity from 5.2 million tonnes to 2.6 million. Rouse, BlueScope's learning and development manager, says "for better or worse" he had to call on the experience of 30 years ago as he oversaw the redundancy of 800 workers at Port Kembla and 200 from Western Port.

Two months ago Australia's other steel manufacturer, OneSteel, closed its oil and gas pipe mill at Kembla Grange, taking with it 60 jobs and bringing to an end the company's manufacturing in the area.

As steel has faltered, the ripples have spread through the Illawarra. Phillips, now regional assistant branch secretary of the Australian Workers Union, reels off a list of businesses that have either reshaped themselves or shut up shop. And they are not all small and local.

He points to the international firm Bredero Shaw, once part of the Halliburton stable, which closed its only Australian plant, at Kembla Grange, in February. It's not as though it had no business. Bredero Shaw secured contracts to provide pipeline coatings and other services for the massive Wheatstone gas project off Western Australia, and to coat the 900-kilometre Inpex gas pipeline from the Timor Sea to Darwin. But the work is being done at its high-tech plants in Indonesia and Malaysia.

Phillips says the Japanese-owned Shinagawa Refractories Australasia, which bought the technical and manufacturing operations formerly owned by BHP Refractories at Unanderra, was forced to lay off 60 people when BlueScope reduced its operations. Shinagawa won't comment on numbers but last year it announced voluntary redundancies, citing BlueScope's significantly reduced demand for its refractory and insulation products.

There is a deep-felt resignation locally that this time the steel industry will not get back on its feet.

"It's like 'death by a thousand cuts'," one Wollongong identity told the Herald. "Every six-month statement by BlueScope Steel to the sharemarket, the town holds its breath for more cutbacks.

"In a sense, it would be better if the company just bit the bullet and closed the lot down, rather than have the area hanging on by its fingertips for management to see if it can fend off the inevitable."

The region's leaders and policymakers are contemplating the possibility of a complete shutdown of the Port Kembla steelworks "in the not too distant future", says a recent report by the centre for small business and regional research at Wollongong University.

Unemployment in the Illawarra is more than 7 per cent, well above the national average of 5.2 per cent, and is forecast to top 9 per cent, Simon Pomfret of the Illawarra Regional Information Service says. "Unemployment is still creeping up," he says, pointing to contractors who had relied on BlueScope, and a slide in manufacturing, with OneSteel and some stainless steel manufacturers closing. He says another 300 to 400 jobs are at risk.

Research by the Illawarra Regional Information Service and the University of Wollongong estimates there were 4281 full-time equivalent jobs at the steelworks before its partial closure, with another 6051 "indirect" jobs. If the plant had closed last year, it would have been devastating - wiping out one in 10 jobs in the region, 13 per cent of household income and 4.4 per cent of gross regional product.

Steel has been made in Port Kembla since the 1920s, on a 760 hectare site that spans half the deep-water port's foreshore.

Clad in hard hats, protective glasses and fluoro safety coats, our small group, which is touring the BlueScope plant, climbs up and down metal stairwells, dwarfed before silo-like gas holders and the superstructure of the remaining operating blast furnace. This blast furnace, #5, was built 40 years ago and reconditioned in 2009 at a cost of $370 million. Both equipment, and the workforce, can be measured in decades.

BlueScope's external affairs manager, Mike Archer, says the company's engineers live for the relinings [reconditioning]. "After the project ended there were three engineers who retired, and they had 151 or 153 years of service between them."

Inside the superstructure there's a catch at the back of your throat, sulphur in the air as it escapes from the nearby slag pit. Above, the furnace rises like a rocket, with plugs and tubes feeding in pre-heated air. Temperatures get up to 2200 degrees.

There are few workers here or in the cavernous hot strip mill that extends for more than half a kilometre. Those on deck are in watchtower control rooms guiding computers and monitoring equipment, eyes glued to screens. The biggest gathering of steel workers we see is a maintenance crew servicing a trough - pronounced "trowe" - into which the molten iron and slag flows from the furnace. Now it takes just 3500 permanent employees and about 1000 contractors to keep the plant operating seven days a week, 24 hours a day.

Spun out of BHP a decade ago, BlueScope and OneSteel have turned out to be among the worst investments in the sharemarket over the past few years.

Both have been caught in the crosshairs of surging prices for coal and iron ore, and the strong dollar, which has choked off their access to export markets while fostering cheap imports.

OneSteel has benefited from owning iron ore mines, while BlueScope, which has coalmines on its doorstep in the Illawarra, began looking at buying mines only after prices had surged.

That access to its own iron ore supply, which it also sells abroad, coupled with recent diversification to service the mining industry, has helped OneSteel emerge as one of the market's best performers over the past few months, with its share price close to doubling from recent all-time lows at about 70? before the market's latest wobbles. But it remains far short of its highs near $7 before the global financial crisis of 2008.

BlueScope, with a much larger exposure to the steel industry, is a shadow of its former self. Its shares hit a low yesterday of 32?, compared with $8 in early 2007.

Last year it recorded an underlying loss of $118 million, which blew out to $1.054 billion when it instigated a massive asset writedown. In the words of its chairman, Graham Kraehe, both the financial performance and the plummeting share price were "unacceptable". The BlueScope chief executive, Paul O'Malley, told the markets at the company's half-yearly results that he expects a return to a profitable run rate by the end of the 2011-2012 financial year.

When asked about the continuing viability of the Port Kembla steelworks, Mike Archer rejects the doom and gloom talk, and points to recent capital works at the hot strip mill. "There's a whole lot of investment at Port Kembla and you don't do that unless you think you've got a future," he said.

By exiting the export business, where it competed at the commodity end of the slab and hot roll coil market against international steelmakers, BlueScope can concentrate on its expertise in the domestic market, such as its premium products including Colorbond and Zincalume.

Wollongong has had precious little traction generating much business success outside of the coal industry, which helped it emerge as a steel production centre, hanging on even after BHP's Newcastle works closed in 1999.

Streets Ice Cream was founded in Wollongong, but not much else. Now the largest employer in the region is the health sector, followed by the university and not-for-profit retirement homes. Wollongong is often seen as little more than a distant suburb of Sydney, with as many as 20,000 people commuting to work there each day.

Its deep-water harbour remains the principal grain export hub for southern and south-western NSW, and in recent years has become the biggest port for imported vehicles. The port authority says it sustains 3500 jobs and contributes $418 million a year to the regional economy.

The state government has done its bit by shifting the back office for public sector superannuation schemes to the Illawarra. Now known as Pillar Administration, it has 650 employees. Just two public companies have their head office in the region - Gujurat NRE, which took over the Bellambi coalmine and has spent heavily getting it back into production, and the speciality steel group Bisalloy Steel.

The resources boom has helped soften the blow, with some skilled workers finding jobs at the nearby coalmines, while others have switched to "fly-in, fly-out" jobs servicing the resources boom, mostly in central Queensland. One local consortium, which includes the engineering construction firms Mainteck, AllFab Constructions, K&R Fabrications and KJ Industrial Scaffolding, has become a local leader in the fly-in, fly-out phenomenon.

Shellharbour City Council, which operates the Illawarra Regional Airport at Albion Park, is also finding its feet in the fly-in, fly-out market. A council spokeswoman, Caitlin Lewis, says there have been 36 flights since July, transporting up to 500 people, their destination principally the Emerald region in Queensland. In recent months, flights have also started to the coal and coal seam gas boom town of Narrabri.

Thirty years ago, the Illawarra saw an exodus as laid-off steel industry workers left to find work. It's not a scenario that the council wants repeated. Wollongong has looked closely at the work done by the University of Waterloo and the provincial government in southern Ontario, Canada, which 15 years ago found itself in a similar situation with the collapse of much of its traditional industrial base.

There, the university and government focused on information and communications technology, with some success. It won initial investment from Research In Motion, the developer of the Blackberry, and, more recently, research and development units from Google and Microsoft. The region benefits from its proximity to the US but perhaps more specifically from a decision to give researchers at the University of Waterloo greater control of their patent successes.

With Wollongong University claiming the largest number of IT graduates of any Australian university, the Canadian example offers a template for future development.

"It offered us a model of 'it can be done'," said the director, innovation and commercial research at the university, Elizabeth Eastland, who is the driving force behind much of the effort. In the Illawarra we have the building blocks - the university, the infrastructure, the research and the labour force - that wants to stay here."

In part, the plan is to ensure jobs can be created locally, by fostering IT companies to set up in Wollongong, and mentoring entrepreneurs by developing local incubators.

In February, after several months of planning, Wollongong Council launched "StartPad", setting aside office space for start-up businesses in the city centre. They have access to pro bono legal assistance, mentoring and coaching. The state government is covering the operating costs of the office while the university mentors the start-ups. Already there are 11 companies with more than 17 staff working out of the centre.

Others have turned their attention to the future of steel. The head of the Business Council of Australia, Tony Shepherd, has a long business career in infrastructure projects, including the Sydney Harbour Tunnel. Recently he reminded a younger audience that Australia had worked hard after World War II to build its steel and heavy industry capacity, after being caught short.

"From a strategic point of view, we need to look at the core industries we need to retain for reasonable self-sufficiency, but we should look at trying to make them as globally competitive as we can," Shepherd said. "We have had 60 years of peace, but who knows?"

Shepherd may have put his finger on the one idea that may find common ground among politicians about whether Australia should continue to produce steel.

Money will flow - $300 million is due to steel manufacturers from the steel industry transformation plan in the wake of the carbon tax. A first round of grants worth $16 million has been announced by the Illawarra Fund, a venture by BlueScope and the state and federal governments to diversify the region's economic and employment base.

But Wayne Phillips is not holding his breath. He has no time for BlueScope executives and the bonuses awarded to them last year, which precipitated a shareholder revolt, but he is sympathetic towards local managers. "The company at the moment is doing it really tough, financially. We need help. I don't want a politician's promise, I want real hardcore change," he said.

That means, for example, mandating Australian steel content of more than 50 per cent in government infrastructure projects.

"Five years from now, I don't think the steelworks will be here," he says, as a laden coal train trundles past his office window. "Wollongong is dying. We are not going to be a tourist mecca. What are you going to show them - a bunch of empty buildings? We don't have the resources to change like Newcastle."