Who wouldn't like to see more manufacturing in Australia? Actually, that's too weak. Currently Australia's the output of manufacturing sector is dropping by roughly 1% per year. We are loosing around 40 manufacturing jobs in Australia every working day. [*] Sounds like a recipe for a long term mess to me.

But the suggestions offered by the author come across as feel good platitudes. He says "re-invest in education, science and technological innovation of high quality". Sounds wonderful; you would have trouble finding anybody that disagreed with it. But how does it fix the problem that it is cheaper to export our coal and iron ore and re-import the steel than it is to do the value add here? The author makes no attempt at connecting the two.

In fact he makes no attempt to quantify any of the problems or the solutions. I guess this is "Online Opinion" and so unsubstantiated political statements are the norm. But I was hoping for something more substantial from a Professor of Chemical Engineering. In fact, I am sure he would insist on it from his own students.

[*] These figures came from the AMWU's web site. http://www.amwu.asn.au/default.asp?action=LoadArticle&ID=2612 I find it odd yet comforting that it is a union's web site was the top hit in Google with up-to-date figures.

rstuart,you are on the money with the reference to costs. It is indeed cheaper to export our raw materials, have someone else process them,then buy back the finished good, than to produce the finished good here. As transport costs continue to rise, then expect to reach a point where that turns around. The bottom line is that we dont pay the "real" cost of the goods that we consume (or utilise). We set standards in Australia that we dont expect our competitors to match - standards that are morally on solid ground,but result in it being too costly to produce such goods ourselves. Take for example:
- OHS regulations
- environmental constraints (emmissions, rehabilitation etc)
- minimum wages and conditions,

Now I dont think for a moment that we should remove any of these - they are there for a good reason! But we need to acknowledge that having these restraints impacts on the cost of production. If we required that a factory in China adhere to the safety, wage and environmental standards that we insist on here, we would find that the goods we purchase are MUCH more expensive than they are now.

So what to so? For a start we could seek to boycott foreign products whose manufacturing standards (re pollution, employees etc) do not live up to our own. Its awfully presumptuous of us to be happy that some poor chinese teenager risked his long-term health to make a product for us at a cheaper price (its a bit like those city-folk that turn vegetarian after seeking a steer or sheep slaughtered - its perfectly ok if it just comes in a pack off the sueprmarket shelf though). Actually, this reasonably simple step would go a long way to balancing the playing field as far as production costs go, AND forcing some IR and environmental responsibility on manufacturing nations. Of course there is a cost, and that will be felt at the cash register and probably in interest rates (higher costs, higher inflation etc). But the longer we put this off, the more painful it will be.

Lots of "should" words and vague idealism. Our wages are high, construction costs are high, there is little brownfield potential (ie. synergies like co-generation) and a government that shows limited or no vision.

Bluntly there is no money in value adding. For example, Australia imports one million tonnes of caustic soda per year and exports the salt used to make it. We process less than one-tenth of our titanium mineral sands and Bass Strait gas and oil barely supported a chemical industry.

When there were opportunities, such as chemicals based on Bass Strait oil and gas, the government (the dumb Fraser government in 1980), promoted a split of the industry to support Botany. The industry today is potboiler scale, and owned by the Chinese (who should thank Malcolm for that deal with what was ICI).

Then our motorcar industry. $50million paid by government to support a V8 engine development by General Motors. We have FOUR vehicle plants producing for 20 per cent of the population (imports are 80%) ie. one plant per just one million of population, producing ordinary cars. We pay tariffs on imported cars to support dying plants.

Then there is disguised assistance for the rural sector via biodiesel and bioethanol. Old technologies that are producing what are really fossil fuels. Eg It takes 300 litres of water to produce one litre of ethanol.
Lack of vision and expediency marks federal and state governments.
We will continue to be the mine for China until people go to their windows and shout “I am as mad as hell and I am not going to take it anymore” (Peter Finch, movie Network)

Describing minerals processing operations as “value-adding” industries is misleading. All viable economic activity adds value – if a business doesn’t add value and isn’t subsidised, it will collapse. The economic well-being of a community is greatest when it focusses on those activities at which it is best at adding value, which in Australia’s case includes resource extraction.

Conversely, investments which do not at least cover their risk-adjusted opportunity cost (that is, the return available from alternative uses of the funds involved) are wealth-destroying, not wealth-creating. Too many so-called value-adding initiatives in Australia have been wealth-destroying, often being non-viable even with massive government subsidies. The call for such industries usually comes from those outside the commercial field. It is often on the basis that “We have the minerals, we have the energy, therefore we can compete in processing.” Not so – in the AMC example below, we found that these were only two of 12-14 critical factors in completing globally. Queensland scored well on minerals availabilty, moderately on emergy costs, and badly on eveything else.

Commercial businesses and investors thrive or fail on their capacity to correctly identify and pursue profitable opportunities. The skills required for this are highly valued and are in great demand, particularly by firms and investors who operate globally. If there is a profitable opportunity available in Australia, it is unlikely to be overlooked.

Nevertheless, governments and public servants with little relevant expertise frequently think that their capacity to identify and pursue viable commercial opportunities exceeds that of the businessmen whose livelihood depends on that capacity. In practice this almost invariably leads to poor investment choices at great cost to the state concerned. A classic example is Queensland’s light metals project, the Australian Magnesium Corporation (AMC).

The possibility of a light metals industry in Queensland had been considered for more than 20 years without attracting serious commercial interest. Despite this strong indication that it would not be viable, the Department of State Development vigorously pursued the project. (more)

A major user of magnesium metal is the motor vehicle parts industry, and DSD’s preferred client for the metal was Teksid, the world leader in metal automotive parts. Teksid analysed the opportunity and said that a light metals industry would never be viable in Queensland At the same time, Queensland Treasury undertook detailed economic and financial analyses (under my direction) which came to the same conclusion. This analysis was never challenged or faulted.

Nevertheless, with strong support from the federal and state governments, the project went ahead. Even with $300m in grants from the Queensland and Commonwealth governments, AMC could not attract commercial support. The State Government therefore developed a scheme to attract small investors to invest in the project. The smelter subsequently collapsed with losses of around $450 million – borne by the promoters, the two governments and the investors - but no minister lost their job.

Another relevant factor in the attempts to attract large metals processing projects is the state’s policy of subsidising metals processing plants through reduced royalty rates. Queensland’s guidelines for royalties on metals provide that “where mineral is processed within Queensland to 95% contained metal, royalty discounts will apply as follows: copper – 20%; lead – 25%; zinc – 35%.” There are two issues here. First, if the minerals were not processed here, they would be exported with full royalties – there is a loss of State revenue from the discounts. Second, overseas processors who buy Australian ore can compete while paying full royalties plus freight for the ore. If royalty discounts are required for firms to operate in Queensland, it implies that they are not internationally competitive. That is, the State is fostering the development of non-competitive industries rather than letting market forces direct resources to viable industries. If the industries can, in fact, operate here profitably without subsidies, then there is no need for them. Either way, there are long-term costs to such distortionary policies which tax viable companies to fund those favoured by the Government, and a query as to whether government infrastructure which supports them is worthwhile.

I'm curious Faustino - what do you think was the driving force behind state & federal governments backing the AMC project?
There can't have been many votes in it, after all.

I'll admit it's stories like this that have me sympthasising with those calling for "small government" and for government to stay out of throwing money at projects of questionable value. But are cases like this really that common? And is there a way to ensure that governments are more accountable for and careful with the taxpayer dollars they hand out to industries?