THE PRESS FRIDAY, OCTOBER 30, 1981. Expansion of steel mill

Press, 30 October 1981, Page 12

THE PRESS FRIDAY, OCTOBER 30, 1981. Expansion of steel mill

The Government’s decision to press ahead with the expansion of the Glenbrook mill of N.Z. Steel, Ltd, has been a long time in the making. Whether if is the right decision depends on a large number of factors only some of which are under the control of New Zealand. To the extent that success is under the direct control of the company, the expansion will presumably be carried out with the efficiency that has come to be expected of the company, which is generally acknowledged.as being run well. N.Z. Steel has been a profitable company. It has enjoyed some protection, but has been under the constraint that it cannot charge more than an average of the Australian and American prices. The only protection that the expanded mill will seek, except against the Australian product, is that it will want a tariff against imports that is no greater than the standard world tariffs used against imported steel. It will be important that the company sticks to that.

New Zealand has the ironsands, comparatively handy to Glenbrook, which form the basic raw material for the mill. New Zealand has the coal needed for manufacturing steel, and vanadium will be a valuable by-product of the new process. These factors are in favour of the project. By world standards the present plant is' small, but the process used at the moment does not lend itself to particular problems of scale. The proposed rolling mills, however, ideally require large-scale production.

The case for expansion would seem to be strengthened because a number of manufacturers using Glenbrook steel occasionally find themselves with inadequate supplies. The expansion should ensure that such shortages are brought to an end. It is also encouraging to see a New Zealand company of proved ability showing ambition and pushing for a major expansion.

The expenditure of more than $7OO million which the expansion envisages must, however, be viewed with caution. The expansion is intended to fulfil the needs of the New Zealand market for certain steels, and is also intended to create steel for export. One reason for the export plan appears to be that, to build a new rolling mill of economic size, it has to be bigger than is justified by the New Zealand demand alone. The enterprise has therefore to be assessed partly on its ability to export its product. Of all the world commodities that have market problems at present, steel must be near the top of the list. A great cry for protection has been raised in the United States against imports of subsidised steel from the European Economic Community. Although poorer countries which have been exporting to the United States have been overlooked so far in this- outcry, any protection given to the United States steelmakers is bound to apply to all exporters.

Throughout the world the price of steel is depressed. The international steel market may pick up in the second half of the 1980 s, as Mr John Ingram, the managing director of N.Z. Steel, believes. If the E.E.C. holds to its expressed intention to stop subsidising steel, at least this distortion of the market will have ceased. Big industries have to make decisions about developments in world markets years ahead of production and occasionally have to take big risks. The calculation made in New Zealand has to entail risk and it cannot be forgotten that other countries may make the same calculations as New Zealand is making. In India, for example, a State-owned steel plant is about to be built at the port of Paradip. It is worth SUS2.B billion and

the Davy Corporation of Britain, which will build the plant, has agreed to buy back 50 per cent of the steel at international prices. Britain granted some special aid to support the project. India’s new steel plant may be producing only slightly later than the expanded Glenbrook mill.

The domestic risk may prove to be greater than the international marketing risk. New Zealand has long been engaged in a drive to increase its exports of manufactured goods and has had considerable success. Part of this success is attributable to the fact that manufacturers have generally had access to basic materials at world prices. A depressed world market for steel, for instance, is of considerable benefit to New Zealand manufacturers. If the price of raw materials, such as steel, were to increase markedly, an important basis of the export drive in manufactured -goods would be undermined. At the moment the company offers rebates to manufacturers who use the steel for exports. This is probably not a substitute for manufacturers’ freedom to buy where they will. If the price of steel is. expected to rise, the export drive in New Zealand might be sustained by spending a fraction of the price of the expanded mill and stockpiling steel at the present prices.’ ■The political factors in the decision to go ahead with the expansion cannot be ignored. A few weeks ago it seemed likely that the expansion was going to be delayed still, further. At that time it seemed likely that the Mobil synthetic petrol plant would go ahead without hitches and that the Aramoana aluminium smelter was also ready to go ahead. These two, and the expansion of the Glenbrook mill, were the three big projects in the Government’s growth strategy. Because Mobil refuses to sign the contract until after the General Election, and because one of the partners of the smelter project has withdrawn, the Government apparently feels under some pressure to see one of the big projects go ahead. However, the growth strategy is not confined to the big three and the Government’s intention is clear. Voters were being offered something they could see clearly and. the Government did not need to have one of the big projects started to prove its point.

Steel production is particularly significant in the negotiations for closer economic relations with Australia. New Zealand is a significant market for Australian steel. Under the new arrangement most products would have tariffs or import restrictions gradually reduced. Only a few items would escape the automatic reduction of tariffs and other restrictions. Rulings on these items would be' deferred and the place of steel in them has been debated. N.Z. Steel has apparently told the Government that it is prepared to live with the implications of the Closer Economic Relations after the expansion is completed. This means that steel will be on the deferred list, if the Government accepts the company’s position.

Because the Government wants the expansion for its own political ends, the company has a powerful bargaining lever. The troubling aspect is that this is the first time that C.E.R. has become intimately mixed up with the New Zealand election. Whatever the risks, international and domestic, in marketing the steel, the expansion of N.Z. Steel is not worth the risk of losing the benefits of a closer economic relationship with Australia. Provided that the protection question is sorted out to Australia’s satisfaction in due course, the relationship need not be upset; this will depend largely on performance at Glenbrook and on the world market’s condition when extra steel is produced.