Australia-China FTA Conference in Shenzhen
28-29 June 2006
Australia-China FTA Conference, Shenzhen, 28-29 June
Day 1: Manufacturing
Graham Kraehe, AO, Chairman, Bluescope Steel
Thank you, Heather and ladies and gentlemen.
As a former CEO and then non-executive director of some large Australian companies with plants and investments in China, I have over 20 years of personal experience in this country.
Today I’m going to speak about BlueScope Steel’s experience, of doing business in China…
and about the opportunities and challenges for the Australian steel industry, and our Australian manufacturing customers, of a free trade agreement with China.
In doing so, I hope I will suggest areas of focus for governments, and negotiators, on both sides.
I plan to cover three topics:
- Firstly, a brief overview of BlueScope Steel’s activities in China
- Second, some context setting regarding the two countries’ steel industries
- And finally, the specific issues we believe must be addressed in the FTA.
1. BlueScope Steel in China
So, first to BlueScope Steel and China…
As some of you will know, our Company has a long history of successfully doing business with, and in, China.
Our first sale of steel products to China was in 1915.
Our first manufacturing plant was established in 1990, with further plants built in 1994 at Shanghai and Guangzhou, and in 2003 at Langfang and Chengdu.
These plants make our LYSAGHT® brand of products for the building and construction industry.
These products include steel roofing, fencing and walling, structural decking and trusses.
We also acquired, in 2004, a US-based company called Butler Manufacturing, with plants in Shanghai and Tianjin. Butler manufactures pre-engineered steel buildings, and has now been combined with our Lysaght business in China to create Butler Buildings.
Our newest plant is at Suzhou, near Shanghai. This is a $280 million metallic coating and painting plant. The plant will produce 250,000 tonnes per year of our branded products, such as Clean COLORBOND® steel and ZINCALUME® steel.
The plant is 100 per cent owned by BlueScope Steel, and is our largest single investment in Asia - a region in which we have 26 plants in eight countries.
In fact, BlueScope Steel is Australia’s largest manufacturing investor in both China and Asia as a whole.
Production of painted steel products began in February this year, with our first customer dispatch in March. Commissioning of our metallic coating line is expected later this year.
Construction of the Suzhou plant means we will have an integrated supply chain in China, extending from the manufacture of coated and painted steel coil, to the design, manufacture and installation of pre-engineered steel buildings.
As part of that supply chain, we also have a network of over 50 sales offices.
And we now employ almost 2,000 people in China.
Our model is a little different from those companies that outsource their manufacturing to China, in order to supply the Australian domestic market.
And in my experience, it is one the best strategies I have seen for integration into China and other Asian markets.
Our operations in China are focused on supplying customers in the booming Chinese domestic building and construction industry.
Our niche is high quality, value-added coated and painted steel products, with a particular focus on commercial buildings and infrastructure projects.
And of course having a niche - or a sustainable competitive advantage - is absolutely essential for a foreign company, in a market as large and competitive as China’s.
Our success is founded on those prominent brands that I mentioned a moment ago, such as Clean COLORBOND® steel.
Our customers include local and foreign-owned manufacturers, provincial and local governments, and infrastructure providers.
Some of the projects we have supplied include the Guangdong Olympic Stadium, the Beijing International Airport, the Jin Mao Tower (Shanghai), and facilities for the 2008 Beijing Olympics.
Our experience doing business in China has been overwhelmingly positive.
Government approval for our Suzhou facility was granted in an awe-inspiring three days.
And we have had great support from governments, power companies, construction companies and other suppliers on all our projects.
In return, we are very pleased to be playing a role in the modernisation of the world’s largest and fastest growing country.
We are, and seek to be, an integral part of the Chinese steel industry, bringing world-class steel coating and painting technology to China. In fact, our new investments in Asia mean that BlueScope Steel is the world’s leading metallic coater, as a proportion of the hot rolled coil we produce.
One of our objectives in China is to find quality local suppliers for this hot rolled coil, to replace the feedstock we currently import.
2. Context - Australian and Chinese steel industries
Now to some context about the Australian and Chinese steel industries…
One of the concerns I have heard expressed in China, is the potential for Australian imports to disrupt local Chinese industries. This is said to be the case, for example, in relation to certain agricultural products.
In the case of the steel industry, however, Australia is a minnow compared to the Chinese giant.
China, in the 2005 calendar year, produced some 349 million tonnes of raw steel. That is more than the steel production of Japan, Germany and the USA combined.
Australia, by contrast, produced just 7.5 million tonnes. So China’s steel production is almost fifty times larger than Australia’s (349 million tonnes vs. 7.5 million tonnes).
After many years as a net importer of steel products, China has now become a net exporter.
The Chinese steel industry is highly fragmented. China has about 54 flat steel manufacturers, and many more long products producers. Of the 54 flat steel makers, the top five have only 33 per cent market share.
Australia has just one flat products manufacturer - BlueScope Steel - and two long products manufacturers.
Despite its small size, Australia is - and can be - competitive. For example, BlueScope Steel’s Port Kembla Steelworks is in the lowest-cost quartile of global hot rolled coil producers. This was achieved with negligible government assistance.
There is no doubt China has some world-class steel companies. But it also has some that are not world scale, or world competitive. Consolidation of the Chinese steel industry will be important in ensuring that it operates on a more commercial basis.
China has already taken some steps to encourage its steel industry to act more commercially. In April 2005, the central government announced its iron and steel industry policy, which is designed to promote the structural adjustment necessary to ensure the industry remains competitive.
This policy includes some laudable aims, such as encouraging industry consolidation and use of the latest technology.
But it also contains proposals to limit foreign investment in Chinese steel companies, and to promote self-sufficiency in all types of steel products.
I would suggest the latter two aims are not entirely compatible with the desire of both countries to promote freer trade.
However, there is at least one issue where the interests of the Chinese and Australian steel industries are aligned, and that is raw material prices.
Since 2004, the steel industry has had to absorb iron ore price increases of forty, seventy-one, and nineteen per cent year-on-year. That is 130 per cent over three years.
Like our Chinese counterparts, BlueScope Steel is largely a price taker when it comes to raw material purchases.
Unfortunately, increases in raw materials prices are having a serious and damaging effect on costs in the steel industry, and therefore in the wider manufacturing sector.
3. Issues for the steel industry in an FTA
Let me now turn to the opportunities and challenges of a free trade agreement with China.
There is no doubt a comprehensive FTA has the potential to deliver some benefits for Australian companies.
One of these potential benefits is the streamlining of investment rules for foreign investors, like BlueScope Steel.
For example, an FTA could make repatriation of profits and the movement of capital more straightforward.
It could also ensure Australian investors in China have access to high quality, competitively priced services - an essential component of manufacturing competitiveness.
And an FTA has the potential to standardise rules of origin, ensure consistency in Customs procedures, and strengthen intellectual property protection.
All these issues are of interest to BlueScope Steel, and I’m sure to many other Australian companies.
In our view, however, an FTA must also address some critical imbalances in the trading relationship between the two countries.
A threshold issue for the Australian steel industry is the current imbalance in tariffs between China and Australia.
The Australian steel industry has very low levels of tariff protection, and negligible government support.
In fact, Australia has one of the most open markets for steel products in the world.
Most flat steel products are able to enter Australia from China tariff-free. This was an outcome of China’s WTO accession agreement with Australia, under which it was granted developing country status.
By contrast, Australian steel companies face tariffs of up to eight per cent, if they choose to export flat steel products to China.
This may not sound like a large barrier, compared to the very high tariffs of 30 or 40 per cent faced by some Australian exporters to China. But in a highly competitive global market, where prices for many steel products are set according to international benchmarks, it is enough to make Australian steel products uncompetitive in China.
We certainly support the legitimate aspirations of China to modernise its economy and raise living standards for its people.
But it is hard to argue that China is a developing country in relation to its steel industry, which is almost fifty times larger than Australia’s.
Clearly, an FTA that is designed to promote freer trade must ensure the imbalance in steel tariffs is addressed.
Another fundamental objective of any FTA, or indeed of any multilateral trading system, must be to promote trade that is fair. That is, trade in which both parties adhere to some basic trading rules.
Whether it is perception or reality, there is no doubt many Australian manufacturers are uncomfortable with the trading practices of some of their Chinese counterparts.
They fear - quite understandably, in my view - that an FTA will simply amplify the effect of these unfair practices.
What am I talking about?
In the steel industry, we have seen cases of steel products being imported into Australia from China and sold at less than the cost of the raw materials that go into making them.
One Australian customer recently told one of our executives that, even if we gave the steel to him for free, he could not compete with imported Chinese manufactured goods.
Given that most raw materials are internationally traded commodities, and given that both Chinese and Australian steel companies are price takers, it is hard to see how this is possible…
Pricing their products at below cost is a clear indicator of the non-commercial behaviour of some Chinese steel companies.
The conclusion that many Australian manufacturers draw is that some Chinese steel makers are receiving subsidies or other support, either overt or covert.
Predatory dumping can result in lower prices for steel consumers in the short term. In the longer term, it risks driving competitors out of business, and giving pricing power to those doing the dumping.
I know the Chinese Government believes that all of its industry support programs are WTO-compliant.
If companies are cross-subsidising their own products, that is one thing.
But if subsidies or other supports are being provided by provincial governments, or by state-owned banks, or other state-owned infrastructure providers, then that must be addressed.
Let me be clear - BlueScope Steel supports free trade and open markets, underpinned by a rules-based trading system. That is, we support trade that is free and fair.
We were a supporter, for example, of the Australia - US Free Trade Agreement.
If China’s steel surplus continues to grow, some of it will undoubtedly be exported to open markets, such as Australia’s.
This might not be a problem, if this growing import competition was taking place on an entirely commercial basis.
But the Australian steel industry does not want to see an acceleration of unfair trading behaviour.
Chinese and Australian negotiators need to address the very real concerns of Australian manufacturers, and ensure that trade between the two countries is both free and fair.
One thing that will help achieve these outcomes is the further consolidation of the Chinese steel industry. This will ensure there are fewer, larger players, who are likely to take a more commercial approach.
BlueScope Steel wholeheartedly supports measures by the Chinese Government to encourage such consolidation.
Finally, ladies and gentlemen, we believe a free trade agreement must be comprehensive, covering all sectors.
It must address unfair practices and imbalances in tariffs.
And it must deliver benefits for all sectors in Australia and China, including manufacturing.
Thank you.