Thursday, August 25, 2011

If there's one BlueScope they'll be hundreds: Why Treasury shuts its wallet tight

Senior government advisors are trying to ensure BlueScope doesn’t become a Kodak or a Mitsubishi.

Both had problems staying afloat. Both took money from the government, and both sank anyway.

The concern this time is acute. BlueScope will lose 1000 workers when closes its hot strip mill in Western Port and its blast furnace at Port Kembla. A payment, grant or concession to keep BlueScope afloat wouldn’t cost much in grand scheme of government budgets and could even make sense if it was thought its problems would be temporary or limited to it alone.

The problems at the Kodak film manufacturing plant and processing lab turned out to be temporary until it was clobbered by the arrival of digital photography more than a decade later and went under.

Mitsubishi had special problems deriving from its Japanese parent.

But there’s nothing special about BlueScope.

The deepest fear within Treasury is that it will be typical....

Former Treasury boss Ken Henry put his department’s position bluntly in February at his final appearance before a Senate inquiry. Firms in trouble needed to face "the very real question of whether with the exchange rate being where it is they are able to remain in business".

Treasury believes the exchange rate could stay high for 20 to 30 years. It if hands out government money just once to help BlueScope, Holden or whoever stay afloat now it could find itself continuing to hand out money monthly for years to come.

By the time the dollar fell again Australia might not want the equivalents of Kodak to be in business anyway.

“I would say to you then that the best industrial structure of the Australian economy then, in 20 years time, would be quite different from the one we had 20 or 30 years ago,” Dr Henry told the committee.

Treasury’s frustration has been that it is hard to get that message out. It is general advice about what not to do. It only finds a place in government brief when there’s a specific crisis and government ministers are tempted to give in, just once.

The compassionate decision to give Bluescope workers special facilities to help them transition to new jobs and the decision to make former Queensland premier Peter Beattie Australia’s first Resources Sector Supplier Envoy are victories for the Treasury. It has held the line against what could become an unending and pointless drain on the nation’s finances.

The Reserve Bank is having increasing trouble maintaining its line that higher interest rates will soon be needed regardless of the position of BlueScope and other firms struggling under the weight of the high dollar.

Graham Kraehe, BlueScope’s chairman, is a member of the Reserve Bank board. Also on the board are former Roger Corbett, chairman of Fairfax Media (publisher of The Age) and Jillian Broadbent a current director of Woolworths.

The Bank insists all of its recent board decisions have been unanimous. But those decisions have been to keep rates steady at a time when Bank staff saw the need for interest rate hikes.

That’s why the market is betting on lower rates. It expects the Bank to give it the hearing the Treasury will not.

Published in today's Age


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2 comments:

Anonymous said...

This is why it makes complete sense to have a carbon tax at the same time which will reform a struggling economy! Woo Hoo!

In case it is not obvious, I am being sarcastic.

The Lorax said...

There are thousands more Bluescopes in the pipeline.

Ken Henry said this is "the biggest external shock to our economy in history". The imminent wave of 'restructuring' will be way bigger than anything that happened in the 1980s. Way bigger.

And in case you need reminding, the sectors that are feeling the pain are the big employers, and the sectors that are booming are capital intensive and will never employ more than 5% of the workforce.

Do the math. Full employment will not be a problem for the RBA in 2012.

FWIW, Graham Kraehe, Roger Corbett and Jillian Broadbent are not the villians of the RBA board -- they're the heroes. They saved non-mining Australia from a painful recession in 2011, a recession that would have been self-inflicted by Treasury and RBA bureaucrats.

Please, promise me one thing. If this plays out how I think it will, can you please stop parroting the Treasury view and critique it a little more often.

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