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Executive Summary

Australian crude steel producers cannot compete within global markets because of
domestic structural factors, as well as the elasticity and excess of supply abroad,
leading to shutdowns and withdrawals from the marketplace. The evolution of the
global crude steel market has been heavily influenced by macroeconomic and
microeconomic factors. The Global Financial Crisis (GFC), the European Debt Crisis,
contractionary monetary policy in China and anaemic growth within the US has
reduced demand worldwide. Moreover, supply is elastic and government subsidies,
particularly from China to crude steel producers, have exacerbated a market surplus.
Consequently, prices within the global market have fallen. Regarding Australian
firms, unique costs restrict their competitiveness. High wage and energy prices, and a
sustained appreciation of the Australian Dollar (AUD), are the primary causes of this
lack of competiveness. Australian firms have reacted by withdrawing from export
markets and minimising average total costs to stem economic losses.

Australian crude steel producers cannot compete within global markets because of
domestic structural factors, as well as excess of supply abroad, leading to shutdowns
and withdrawals from the marketplace. Recent global economic downturns have
reduced market demand worldwide, while supply elasticity and a market surplus
reduce prices. Domestically, Australian firms face high input costs and an appreciated
Australian Dollar (AUD) that restrict their competitiveness. Australian firms have
reacted by withdrawing from export markets and shutting down portions of their
plants to minimise losses.

The interaction of demand and supply has produced a lower equilibrium price within
the global crude steel market. Recently, demand has fallen because of the GFC, EU
Debt Crisis, contractionary monetary policy in China and anemic US economic
growth (Anderlini 2013). This has contributed to lower levels of confidence and
therefore investment and consumption (Miller 2012). Consequently, the quantity of
crude steel that consumers are willing and able to purchase at a given price has fallen
(Anderlini 2013). In the short term, this produces a surplus that will be eliminated in
the longer term as producers lower prices and move to a new equilibrium as
illustrated in figure 1 (Miller 2012). Secondly, government subsidies within China
enable commercially unviable mills to continue producing output and thus
exacerbated the oversupply (Anderlini 2013). Finally, supply is elastic because there
is excess production capacity (Bloomberg 2012). Steel mills in 2013 have a
production capacity of 1.8 billion tonnes, but output of just 1.5 billion tonnes (Miller
2012). Subsequently, prices remain low because any increases in demand are quickly
met with increased output and not higher prices (Garnett and Obrien 2011). These
factors have contributed to US crude steel prices falling over 35% to $636 a tonne

from over $1,000 a tonne before the GFC (Mason and Antonioli 2012). Evidently the
global crude steel market has transformed over recent years.

Fig. 1

The appreciation of the AUD and high domestic input costs has reduced Australian
crude steel producers international competitiveness. Firstly, growth within the
mining industry means that demand for skilled labour increases, which elevated
resource wages by 5% in 2012 (Plumb 2013). Therefore steel producers must pay
more in wages to attract labour. Secondly, the carbon tax increases costs for the
energy-intensive crude steel industry (Plumb 2013). Expensive labour and energy
inputs require firms to reduce the quantity at which they are willing and able to supply
the marketplace at a given price, reducing equilibrium quantity and increasing
equilibrium price, illustrated in figure 2 (Garnett and Obrien 2011). Thirdly, a
sustained appreciation of the AUD increases prices of Australian crude steel relative
to other countries (Macdonald-Smith 2012). Foreign competitors thus become more
competitive because consumers must purchase Australia steel using AUD. Moreover,
crude steel imports become cheaper and threaten the domestic consumer-base of
Australian producers (Macdonald-Smith 2012). Consequently, Australian trading
conditions are tough because domestic firms competitiveness has been eroded by
high inputs costs and an appreciation of the AUD.

Fig. 2

Australian firms are responding by shutting down plants and minimsing average
costs. Firms reach shutdown point when the market price does not exceed average
variable cost to stem losses, as illustrated in figure 3 (Garnett and Obrien 2011).
Currently, Australian firms are retrenching workers and rationalising supply chains to
maximise their technical efficiency and therefore minimise average variable costs
(Lanin 2013). However, Bluescope Steel shut down its export-oriented Port Kembla
plant and exited export markets (Lanin 2013). In the long term, Firms exit markets
when there is no economic profit to be made, the sum of implicit costs, the
opportunity cost of production, and explicit costs, pertaining to direct expenses
(Garnett and Obrien 2011). Unless Australian firms can become more efficient,
domestic crude steel producers like Bluescope Steel are likely to continue exiting the
market due to the absence of economic profit (Brooks 2012). Australian firms are thus
shutting down and exiting export markets because they lack competitiveness.

Fig. 3

Global demand for crude steel has fallen and production capacities have

increased, leading to lower prices. In regard to Australia, structural factors such


as high energy and labour costs have necessitated an increase in their prices.

Moreover, the sustained appreciation of the AUD has aggravated Australias lack
of competitiveness by increasing the relative prices of Australian crude steel.
Finally, Australian firms have responded by shutting down plants and

rationalising operations to improve technical efficiency, as well as partially


withdrawing from export markets to stem losses.
Word Count - 740

Reference List
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Lanin, S. 2013, More Cuts Likely in Struggling Steel Sector, Australian


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Plumb, M. 2013, Implications for the Australian Economy of Strong Growth in Asia,
Reserve Bank of Australia, Australia, viewed 8 October 2013, from
<http://www.rba.gov.au/publications/rdp/2013/pdf/rdp2013-03.pdf>.