Professor James Morley

The high Australian dollar certainly plays a role, however when you consider why Bluescope shut their blast furnace at this particular point of time, it isn’t just a high dollar – there are other more basic economic factors at play.

BlueScope Steel yesterday announced it was axing 1000 jobs because it had become unprofitable to export steel with the historically high levels of the Australian Dollar, and unions have urged the government to move to change this.

There is just a lot of steel being produced globally at the moment relative to expected demand, suggesting prices will be low in the future. I note the phrase ‘global steel glut’ cited by Bluescope in their announcement, which I translate as a prediction by them that they expect steel prices to be low for the next few years. The high dollar is only a small part of the story. I think the bigger bet for Bluescope is that demand from Asia (presumably China in particular) is not going to be as robust in the future, perhaps due to the recent financial market wobbles, including in China.

Bluescope are closing some parts of the operation, and mothballing others, such as the galvanising line at Hastings. It can make sense to mothball some operations and hold off on steel production until prices are predicted to be higher again. There’s no sense in producing at a predicted loss, but at the same time it cost a lot of money to build to plant to make steel, so if the plant can mothballed, production may start again quickly if there is a sudden uptick in demand.The Federal Government says it will announce further measures this week to help promote Australian products, as unions fear that thousands more jobs will be lost because of the high Australian dollar. This has reignited calls for government intervention and a cut in interest rates or a sovereign wealth fund to rein in the exchange rate. This would be a national fund to save more from the mining boom received backing from the Greens, and the Australian Industry Group.

The high dollar is partly driven by interest rates. But I doubt a cut in rates by the RBA would trigger any imminent reopening of a steel plant. Interest rates are set by the RBA who look at all market conditions – including inflation pressures. Broader economic developments for the whole country would be much more of a concern for the RBA than the closing of a section of a steel plant, even if it is painful for the local economy.

James Morley is a Professor of Economics at the Australian School of Business.