The coming collapse in manufacturing gas demand

The clock is ticking for the government to find a solution to rising gas prices as demand in Australia's shrinking manufacturing sector continues to slide.

I head for two pages in particular whenever the new Energy Supply Association yearbook arrives in my mailbox, as the 2014 edition has just done. The first page is a forecast of electricity sent out by power stations for the next 10 years, and the second is a prediction of gas consumption by sector between now and the 2030s.

The latter is of particular interest at present as at least some manufacturers try to revive the flagging argument for domestic gas reservation -- flagging because it has been roundly dismissed by the federal government, canned by an independent regulator in WA and is of no interest to states like Queensland.

There has been a sea change in the ESAA projections in the past two years as its members (whose senior managers contribute to the forecasts) come to terms with the changing scene in energy demand.

For electricity, back in 2012 the association forecast that system energy flowing through the east-coast market would reach almost 248,000 gigawatt hours by 2020-21 -- and now it is projecting 211,000 GWh. (The actual flow in 2012-13 -- the latest yearbook data -- was 187,476 GWh, a fall of 8000 GWh over two financial years.)

Far more scary if you are a politician is what the ESAA gas forecasts throw up -- especially in terms of manufacturing demand.

Back in 2012, the association could see total national domestic demand rising from 1128 petajoules at the decade’s start to 1560 PJ by 2020-21. Now it projects that demand won’t crack 950 PJ at the decade’s end and won’t be much higher throughout the ‘20s.

‘Collapse’ is the operative word for the outlook for manufacturing demand for gas. Starting with it sitting at 368 PJ as the decade began and now being 325 PJ, the trend, says ESAA, is ever-downward -- to 242 PJ in 2022-23 and 180 PJ at the end of the ‘20s.

There are an awful lot of lost factory jobs inherent in the ESAA forecast. For politicians, that is something rather like Peter Pan’s ticking crocodile.

Meanwhile, the manufacturers’ rhetoric uses the same point to warn stridently of the effects of soaring gas prices as the $60 billion LNG export developments in Gladstone get near their commissioning.

Bluescope Steel chairman Graham Kraehe is the latest to kick this can. At an Australian Industry Group lunch forum in Sydney last week, as a warm-up speaker ahead of the prime minister, Kraehe warned of an exodus of manufacturers if “excessive” gas prices are not addressed.

Kraehe, who is also chairman of packager Brambles, told Tony Abbott and the audience that the government needs to encourage new investment in gas through incentives based on allocating some of what is found to the domestic market.

Abbott deviated from his prepared address to tell Kraehe his comments were “full of interest and value” as well as assuring him that the government’s energy reform doesn’t end with abolishing the carbon tax and “some work with the renewable energy target” -- but he refrained from commenting on reservation.

His industry minister, Ian Macfarlane, who is due to deliver a speech in Sydney in mid-September on energy policy, described reservation as “ideological claptrap” back in May, and WA’s Economic Regulation Authority has called for the policy to be dumped in the state, saying the costs far outweigh any perceived benefits.

This won’t stop some of the manufacturing leadership from pushing the line but it was notable last month that a statement on gas price concerns by six associations headed by Ai Group did not refer to reservation even while lamenting the “paradox” that bringing the nation’s abundant gas resources to market should be damaging to the factory sector.

There is an urgent need for gas market reform and greater production, the sextet said.

What’s clear from the ESAA forecast is that use of gas by major manufacturing sector businesses including aluminium, chemicals, food and beverages, paper and galvanising, is set to go backwards over the next five to 15 years.

The question for the Abbott government, and especially the state governments in NSW, Victoria and Queensland, is what, if anything, can be done to help them? It is a question that goes a long way beyond gas prices, important as they are.

Reacting to the sextet’s statement, the Australian Petroleum Production & Exploration Association has said that, in addition to removing restrictions on gas supply, governments should be focusing on initiatives to boost national productivity and to encourage investment in industry by, among other things, lowering tax burdens, improving regulatory efficiency, making labour markets more flexible and investing more in skills.

Tick, tick, tick.

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