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Steel in Australia: BHP Steel

By Diana Kelly¹ and Elsa Underhill²

Part a

Introduction
Competitiveness
Human resources management
Labour-management cooperation
Productivity and quality improvements
Environmental management
Technology
Role of the Government in restructuring and adjustment
Conclusions
References

Introduction

In 1996, BHP Steel produced 7.69 Mt of steel (4.19 Mt for domestic consumption), compared with 5.54 Mt (4.43 Mt for domestic consumption) in 1990. Expanded production throughout the 1990s has mainly gone for export, which now account for about 42% of despatches. The company has a wide product range and dominates the domestic market (imports less than 10%) in plate, hot-rolled steel for pipe and tube, tinplate and structural shapes. Import competition (penetration rates above 10%) is experienced in general hot-rolled steel, coated products, and cold-rolled sheet and coil, with imports of the latter increasing rapidly.

Employment in BHP Steel fell from approximately 32,000 in 1982 to 20,000 in 1988, and 12,000 in 1996. Employment at Port Kembla fell from 9,406 in 1990 to 7,036 in 1996. The occupational distribution of the Port Kembla workforce is shown in figure 1.

The age profile of different occupational groups reflects the impact of redundancy and recruitment. Most adversely affected by redundancy and recruitment slowdown were unskilled ironworkers; 63% of ironworkers are over 40 years of age and 36% are over 50. Conversely there has been greater demand for skilled tradespersons; continued recruitment has kept the age profile down, 40% being aged over 40 and only 16% over 50 years. While data on workforce education levels is not available, it is likely that general educational standards have risen dramatically on account of the demand for skills (more than 50% of ironworkers on the newest blast furnace hold an Associate Diploma in Metallurgy), allied with structural shifts in the proportion of management and tradespersons (holding post-secondary qualifications) to unskilled workers (without such qualifications).

As the size of the workforce has shrunk and new technology has been introduced, labour productivity has increased. In 1983 labour productivity for BHP Steel was 178 tonnes per employee per year (211 tonnes at Port Kembla). By 1990 this had increased to 342 tonnes per employee (Port Kembla 381 tonnes) and by 1996 it had risen again to 636 tonnes (Port Kembla 672 tonnes). Many factors, including better industrial relations, are claimed to have contributed to this improved performance. All BHP steelworks are highly unionized (union density is approximately 90% among blue collar workers at Port Kembla and Newcastle). In the past union-management relations were hostile -- work stoppages peaked in 1983 at 50 hours per employee per year. Since then stoppages have become less common and have had less impact on work time. Since 1983 BHP Steel has enjoyed a sustained expansion of output and exports, high investment in new technology, and unprecedented union-management cooperation, despite enormous job losses.

The long-term objectives of BHP Steel to 2005 are unclear. Greater commercial pressure, especially low profitability of steel operations relative to other divisions of BHP, have caused the company to consider options for restructuring its operations. At the time of writing, no decisions had been taken. However, options being canvassed included winding back production at the Newcastle and Whyalla integrated mills, investing in a new mini-mill in Western Australia, and developing mini-mills in the Asian region. Since 1983, the company has relied upon integrated mills. Mini-mills are now seen to be relatively advantageous in terms of cost, feedstock feasibility and future environmental demands.

After this paper was written, early in 1997, BHP announced at the end of April 1997 that the closure of steelmaking operations at the Newcastle works would be brought forward by three years to 1999 with the loss of 2,500 jobs. Two smaller mills in Sydney and Geelong would also be shut down and the closure of the Whyalla works and one in New Zealand within ten years was not ruled out. The restructuring is expected to save more than $A500 million a year and is a crucial part of BHP's plan to raise productivity to 1,000 tonnes of steel per employee per year.³ (Ed.)

Competitiveness

Imports have significantly eroded BHP Steel's market share in plate and cold-rolled sheet and coil. BHP Steel, on the other hand, has marginally increased market share in hot-rolled steel for pipe and tube and coated products.

Table 1. Australian market share of BHP Steel Port Kembla and imports, selected products, 1990-95 (per cent)

Several factors continue to threaten BHP Steel's domestic market share. Firstly, falling tariffs. Tariff levels have always been relatively low in the Australian steel industry; they are currently 5% for most imported steel, and zero for product sourced from developing countries such as Brazil.⁵ Australia's relative geographic isolation delays steel imports, but this is only a partial deterrent (ACCC, 1995), leaving domestic supply still exposed to falling tariffs. The second factor is rising costs. BHP Steel has, in the past, had a cost advantage relative to overseas suppliers due to the abundance of relatively cheap natural resources. This cost advantage diminishes past the melted-iron stage of production but BHP Steel is still a low-cost steel producer. Estimates in 1994 placed BHP Steel's comparative production costs on a par with Korea and Brazil, and below the United States, Japan, European producers and Taiwan, China (ACCC, 1995, p.70). Third, buyer power in Australia has become more concentrated, dominated by a significant number of large multi-national buyers who globally source imported products. Sixty per cent of BHP's domestic steel is sold to 25 buyers (BHP, 1995a). Fourth is evidence of significant customer resistance to BHP's steel product. A survey of Australian steel importers showed a preference for imports on both quality and price grounds (ACCC, 1995, p.114). Competition in the domestic market is unlikely to abate in the foreseeable future, with forecasts of an increasing surplus of domestic production over demand. Figure 2 shows actual and forecast production and demand for crude steel in Australia to 2000.

BHP Steel exports approximately 42% of its output, to 36 countries, accounting for 1.7% of the steel traded internationally each year (BHP, 1995a, p. 1). Although a full range of products is exported, a substantial proportion appears to be slabs exported to BHP's forty-plus overseas rolling mills.⁶ In the mid-1980s BHP Steel began reducing its reliance on spot markets for exported steel and started developing long-term relationships with overseas buyers. By 1992 only 20% of exports were sold on the spot market (Stewardson, 1994). Nonetheless, the value of BHP Steel's exports declined in the 1990s, not the volume. The past 12 months in particular have seen an increase in the proportion of exports in the low valued added range. Factors contributing to this include the entry of new suppliers into BHP Steel's more traditional markets, and the falling international price of steel slabs following world over-supply. Figure 3 gives the volume of BHP Steel's domestic and export despatches for 1990-96.

To counter competition in both domestic and international markets, BHP Steel continues to emphasize the importance of both cost and quality. In addition, plans are afoot to establish steel mini-mill operations in the Asian region which may offer cost advantages over other international suppliers. Better technical and service support for domestic buyers has improved domestic buyers' perception of BHP Steel (ACCC, 1995 p. xvii). BHP Steel also aims to remain at the cutting edge of new steel product development. Seventy-per cent of BHP Steel's Long Product Division's research budget, for example, is directed at new and improved products (BHP 1995a, Section 7, p. 15), and BHP Steel owns international patents on the value-added products Colorbond and Zincalume.

BHP Steel's major impediment to long-term international competitiveness stems from the cost floor inherent in its reliance on integrated mills at its Australian plants. As mini-mills broaden their product range further into areas previously the domain of integrated mills, companies such as BHP Steel will be increasingly priced out of segments of the international steel market. Finally, concern over declining profit levels and the fast changing international steel market led BHP Steel in 1996 to announce a major review into all aspects of their steel operations. The terms of reference include the examination of all steel division assets on the basis of "competitiveness and future prospects, and an assessment of all available steelmaking and production technologies into the next century" (AFR, 2 Jul. 1996, p. 26). Financial analysts and industry representatives alike expect wide-spread changes to flow from this review. The direction outlined above may change in light of what are viewed by BHP Steel's Chief Executive Officer as "fundamental changes" within the steel industry (idem.).

Human resources management

The size of the workforce at Port Kembla has diminished throughout the 1990s, through natural attrition and as a result of minimal recruitment (figure 4). Retrenchments have not taken place, rather redeployment has been offered to all workers when technology has displaced jobs. BHP Steel's redeployment policy gives displaced workers the right to refuse an alternate position in the first but not second instance, and guarantees existing rates of pay for a period of two years.

A policy of low recruitment, particularly of ironworkers, has had a marked affect on the workforce profile at BHP Steel. Sixty-three per cent are over 40 years of age, and 36% are over 50; by contrast there are no iron workers under the age of 20. Apprentice tradespersons continue to be recruited in small numbers, making up 26% of all apprentice/cadets, with the remaining 74% being white-collar workers. Table 2 gives the age distribution of workers employed at Port Kembla in May 1996.

Table 2. Age distribution of workers at Port Kembla, May 1996 (Per cent)

¹ Department of Economics, University of Wollongong.

² Department of Management, Victoria University of Technology.

³ "BHP's rescue plan" in Australian Financial Review, 30 Apr. 1997 <http://www.afr.com.au/content/970430/news/news1.html>; (30 Apr. 1997).

⁴ Statistics were unavailable for long products, and rod and bar.

⁵ Tariff rates on imported steel for white goods have fallen substantially since the late 1980s. For example: refrigerators from 30% in 1988 to 5% in 1996; dishwashers from 25% to 5%; and motor vehicles from 45% to 22% (BHP 1995a, p. 16). Imported steel from Latin America increased by 30% in 1995 to account for 12% of Australia's steel imports; mostly long products.

⁶ BHP International Division Fact Sheets provide an overview without detailing statistics.

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