Artificially oversupplying the gas market under the Federal Government's proposed reservation scheme would do little to improve the competitiveness of Australia's largest manufacturers while risking investment in future gas supply, independent analysis by Wood Mackenzie has found.
Wood Mackenzie analysed the gas costs of 13 of the largest industrial gas users on the east coast, which together generated almost $24 billion revenue and $3.8 billion in profit last year, and assessed the impact of manufacturers' proposal for a ‘must-sell’ obligation requiring gas to be supplied below $10 a gigajoule, even where prices fall below the cost of production.
It found gas accounts for less than five per cent of the facilities’ combined operating costs, and that reducing wholesale gas prices from $12/GJ to $10/GJ would lower combined annual operating costs by just $94 million and increase average profit margins by only 0.4 per cent. Even if wholesale gas prices fell to $8/GJ, average profit margins would improve by just 0.8 per cent.
The report also found many of Australia's largest manufacturers have long-term gas supply contracts to 2035 and beyond, meaning any changes to wholesale gas prices would have little or no impact on their operations.
Australian Energy Producers Chief Executive Samantha McCulloch said the findings reinforced concerns the Government's proposed reservation framework would undermine investment in new gas supply while delivering only marginal benefits for manufacturers.
"The analysis shows cheaper gas is not the panacea for the competitiveness challenges facing Australian manufacturing," Ms McCulloch said.
"Manufacturers need reliable and affordable gas for the long term. But that can only be achieved through a stable and competitive market that encourages investment in new supply.
"Artificially oversupplying the market may deliver a temporary sugar hit, but it would undermine investment in new supply, push domestic-focused producers out of the market and ultimately expose Australian manufacturers and households to higher gas prices.”
Ms McCulloch said Australian gas producers supported a prospective reservation framework that encourages investment in new supply, supports long-term contracting and preserves Australia's role as a reliable LNG trade partner, but the Government's proposal fell well short of this.
"A framework that encourages investment, strengthens competition and brings more gas to market will deliver reliable and affordable gas over the long term.”
The Wood Mackenzie analysis also found other input costs, including raw materials and labour, have a much greater influence on manufacturers' operating costs and competitiveness than wholesale gas prices.
“It confirms that governments can’t solve the challenge of Australian manufacturing competitiveness with a gas reservation, but a poorly designed scheme will threaten Australia’s future energy and economic security,” Ms McCulloch said.
Read the Wood Mackenzie report here.
