Gas prices forcing manufacturers to change business processes

The Australian Competition and Consumer Commission (ACCC)’s latest gas inquiry found that Australian manufacturers were mitigating the impacts of increased gas costs by implementing changes to their businesses.

ACC chairman Rod Sims, in an exclusive interview with the ABC last week, linked increased gas prices to the gas industry misleading governments into approving massive gas export projects that in turn led to soaring power prices.

“I think the gas industry as a whole certainly has to carry a lot of blame for the mess. And it is a mess that we are in; the companies that are closing down and [then] the trouble this is causing for Australian manufacturing and Australian jobs,” Sims said.

“The gas companies assured governments that the local market would be fine, that prices wouldn’t go up. And that turned out not to be the case.

“Often self-interest dominates what companies tell governments.”

While the gas industry lobby group APPEA rejects Sims’ claims, there is no doubt that manufacturers are having to adapt to the prices according to the ACCC’s Gas Inquiry 2017 – 2025 Interim Report, released in January this year.

Many commercial and industrial (C&I) have accepted higher gas prices as the new market norm, according to the interim report and made changes to their businesses to adapt. They have tried to mitigate the impact of increased gas costs through:

  • energy efficiency improvements
  • substituting gas for alternative fuels
  • reducing headcount or pay increases
  • deferring investments or expansions
  • changing shift/usage patterns

Some C&I users have also deferred major plant upgrades or large maintenance spends, the report cites an example of a user claiming that higher gas prices were the major factor in delaying a $15 million expansion in regional Victoria, which would have added more than 100 staff to the existing 330 strong workforce.

“We have delayed our plant construction. Margins have compressed, with gas cost being the most significant factor. We are undergoing a round of cost cutting and price rises with the aim to get margins back to an acceptable level. If we are successful in meeting our cost reduction targets, we can go ahead with the planned expansion plans. We continue with low cost aspects of planning preparation for the build, but tenders for construction and the like are now being held back,” an east coast gas user told the ACCC in September 2019.

Some C&I users said they had limited options for further reductions to their gas use without significant capital investment.

“We have become as efficient as possible. Further reductions in gas use would require major capital investments, changing the technology rather than tinkering around the edges. In a low margin, volatile business environment this sort of capital investment which has a 10 year return is not feasible,” another east coast gas user said in October 2019.

A large number of C&I users are also exploring alternatives to gas. Incitec Pivot, a fertiliser and explosive maker, for example, was undertaking a $2.7 million feasibility study to expand its ammonia producing Moranbah facility in Queensland.

Incitec Pivot has manufacturing plants at Gibson Island, Phosphate Hill, Moranbah and Moura. Vice president of the company’s Group Energy Strategy, Tim Lawrence, said current gas pricing available for long-term supply contracts challenged the economics of expanding ammonia manufacturing at the Moranbah site in Queensland.

“The green hydrogen/green ammonia project will not reduce the existing gas demand at the facility, but rather offset a potential increase in demand. The production of green hydrogen is using solar power to supply a water electrolysis facility to supply pure hydrogen feedstock. The green ammonia capacity under consideration is approximately 20% of the current ammonia production, equivalent to approximately 1.2PJ per annum of natural gas demand.” Lawrence said.

Australian Paper is also progressing with an energy-from-waste plant after successful completion of a $7.5 million feasibility study. If implemented, it could reduce its gas use by up to 4 PJ each year.

One C&I user reported that they are considering converting to Liquefied petroleum gas (LPG) because it would cost 25 per cent less than natural gas, but there will also be costs required to convert their equipment.

While a number of C&I users are making decisions regarding plant upgrades and large maintenance spends into the next decade, they are also assessing the long-term sustainability of their businesses while others have advised their operations may become unviable due to rising gas prices.

Some C&I users continue to try to reduce their overall gas costs, but most surveyed by the ACC have said they have largely exhausted all opportunities to reduce their gas use through energy efficiency improvements. Many are now actively exploring alternative energy sources or looking at other ways to reduce their gas costs, including by sourcing gas directly from producers and making greater use of short-term trading markets.

One user stated that passing on prices to clients resulted in some customers converting to imported products.

“Our work on the Inquiry to date has highlighted the ongoing need for a greater level and diversity of supply in the market, the need for greater transparency and a more efficient transportation and storage network,” the report states.