australian wool industries secretariat inc · - 2 - australian council of wool exporters &...

Australian Council of Wool Exporters & Processors Submission to Inquiry into Manufacturing In Victoria 2009

AUSTRALIAN COUNCIL of WOOL EXPORTERS & PROCESSORS INC

9 October 2009 ACWEP-09-225

The Hon Christine Campbell MP Chair Economic Development & Infrastructure Committee Parliament of Victoria Parliament House Spring Street EAST MELBOURNE 3002 By E-mail: [email protected]

Dear Ms Campbell,

Submission from Australian Council of Wool Exporters & Processors to

Inquiry into Manufacturing in Victoria

Thank you for your invitation to make a submission to the above Inquiry. My apologies for the delay in responding, as explained to your office.

The Australian Council of Wool Exporters and Processors (ACWEP) is the peak body representing Australia’s wool buyers, early stage processors (scourers, carbonisers and topmakers) and later stage wool processors (spinners, weavers and garment makers) and exporters.

By way of background, scouring involves washing greasy wool to remove the grease and dust. Carbonising is the process of removing the vegetable matter (grass seeds and sticks etc) from scoured wool. Topmaking is the removal of vegetable matter from scoured wool and the creation of a continuous sliver of aligned wool fibres. Topmaking is the last stage before spinning.

This submission has a greater emphasis on early stage processing, as many of the issues facing later stage processors are common to their colleagues working with other fibres and are covered in the submission from the Council of Textile and Fashion Industries of Australia Limited.

ACWEP would be pleased to meet with the Committee at a time of their convenience.

Please contact the undersigned with any queries.

ACWEP’s submission covers the following areas:

* SUMMARY

* INTRODUCTION The Australian Wool Industry Wool Processing

* INQUIRY TERMS OF REFERENCE 1. The Necessary Criteria Used by Businesses to Transfer Offshore Manufacturing to Victoria

2. Identify and Report on the Factors which Influence Businesses in Determining Whether to Manufacture in Australia or Overseas, Including Consideration of:

* OTHER ISSUES Strategic Issues What Will Happen if the Remaining Wool Processing Plants Cease Operations? Access to Government Funding What Might be done to Assist the Remaining Wool Processing Industry?

Victorian Wool Centre 691 Geelong Road Brooklyn Vic 3025 Tel: 03 9318 0077 Fax: 03 9318 0877

Email: [email protected]: www.woolindustries.org

ABN: 59 831 182 459Reg. No.: A0048500L

mailto:[email protected]

http://www.woolindustries.org/

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* APPENDICES Storm Water Recycling through Wetlands in the City of Salisbury South Australia

A copy of this document has been mailed as requested.

Yours sincerely,

Peter Morgan Executive Director

cc Michael Avery President Australian Council of Wool Exporters & Processors


AUSTRALIAN COUNCIL of WOOL EXPORTERS & PROCESSORS INC

SUBMISSION FROM AUSTRALIAN COUNCIL OF WOOL EXPORTERS & PROCESSORS

TO

INQUIRY INTO MANUFACTURING IN VICTORIA

SUMMARY The Australian wool growing and wool processing industries have reduced in size since their peak in 1990/91 for a number of reasons, including drought / drier seasonal conditions over the last decade and better returns from other farming enterprises such as cropping and sheep meat. Wool exports were worth $2.0 billion to Australia and approximately $600 million to Victoria in 2008/09. Approximately $55 million of the Victorian value was attributable to processed wool.

With regards to the Terms of Reference of this Inquiry, the Australian Council of Wool Exporters & Processors (ACWEP) has learnt through experience that attracting industry with specific Government incentives does not necessarily lead to sustainable manufacturing industry where there are existing players. Such Government support can (and does) lead to un-economic investment decisions that result in overcapacity followed by price deflation and a reduction in the necessary investment for long term productivity improvements. A number of wool processing companies received Government support through the 1980’s and 1990’s to establish wool processing plants in Australia. All are now closed except one which operates on much reduced capacity.

Rather, ACWEP believes it is more important to concentrate on retaining the existing wool processing industry. Apart from manufacturing industry policy reasons, there are a number of strategic reasons which have a broader importance to Australia’s sheep and wool industries. These reasons include the dependence of local “downstream” industries on the availability of scoured wool processing in Australia and the need for a local processing industry should there ever be an outbreak of an “exotic” disease which required that wool be at least scoured prior to export.

The industry is under pressure, but ACWEP believes there are opportunities for the industry and Government to work together to assist with the industry’s ongoing sustainability. This applies particularly to energy and water conservation. ACWEP understands that Federal and State Government responses to climate change will lead to increases in charges for water and energy that are greater than manufacturing industries are able to pass on in terms of increases in prices; and so must absorb them within profit margins and improve their efficiency of operation. As such, wool processing (and other manufacturing industries) could be best supported by Government involvement in water and energy conservation measures and the development of technologies that can be transferred between competing companies and even across different manufacturing sectors.

INTRODUCTION The Australian Wool Industry Drought / reduced rainfall through the last decade and better returns from other farming enterprises such as cropping and sheep meat have reduced the amount of wool grown in Australia. However, Australia is still responsible for over half the world’s requirements for apparel wool. Wool producing sheep are well adapted to Australia’s drier conditions as they have one of the lowest water requirements per hectare of any farming enterprise. So, as the dry conditions prevail in Australia, primary producers are expected keep wool as one of their farming options. It is expected that wool production will bottom out around 330 mkg and stabilize between 350 to 400 mkg.

Wool exports were worth $2.0 billion to Australia and approximately $600 million to Victoria in 2008/09. Approximately $55 million of the Victorian value was attributable to processed wool.

Victorian Wool Centre 691 Geelong Road Brooklyn Vic 3025 Tel: 03 9318 0077 Fax: 03 9318 0877

Email: [email protected]: www.woolindustries.org

ABN: 59 831 182 459Reg. No.: A0048500L

mailto:[email protected]

http://www.woolindustries.org/

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Wool Processing Wool processing has two sectors:

* Early stage processing where greasy wool is scoured, may be carbonised and combed into tops. Tops can be best described as loosely bound continuous filaments of parallelised wool fibres for spinning into yarn.

* Later stage (or downstream) processing which comprises spinning into yarn, weaving into fabric and garment manufacture.

This submission will concentrate on early stage processing.

Early stage processing takes two forms:

* Commission processing for other exporters who own the wool. * Processing wool which the processing company has purchased for its own use.

Wool processing in Victoria remains an important industry to the State and national wool industries despite the contraction experienced in the last ten years. It draws on wool grown in both Victoria and other States.

This contraction in processing has not been confined to Victoria, with contractions in all other States where wool processing is located, namely New South Wales, South Australia and Western Australia.

This has been due to a number of reasons:

* The decline in wool production over the last ten years. * A fall in volume of “other” wool available for processing when the wool stockpile was disposed

of in 2001. * The increasing proportion of Australia’s wool exports going to China. China is the largest global

provider of early stage processing and takes around 97% of its imports of Australian wool in the greasy form. Historically, around 60% of wool exports to other parts of world went as greasy wool. Australia’s second largest export destination, India, also has a large early stage processing industry.

Export Destinations Despite the decline in the local wool processing industry, it still remains an important source of early stage processed wool for many countries. Twenty eight (28) of the 39 countries which imported Australian wool in 2008/09 imported scoured and / or carbonised wool.

Victorian Wool Processors The forced decline in the Victorian wool processing industry has seen the number of early stage processing companies fall from seven to three over the last ten years. The remaining companies are:

* EP Robinson (Geelong) * Victoria Wool Processors (Laverton) * Nikkei Port Phillip Scouring (Laverton – operates from the same site as Victoria Wool

Processors)

There are two plants in New South Wales and one in South Australia. Victoria is the principal source of scouring and carbonising in Australia.

Despite these changes there are compelling strategic reasons to retain a wool processing industry in Australia, as will be discussed later in this document.

Value Adding Local processing, apart from creating jobs, also value-adds significantly to the value of wool exports. The average value per kilogram for the form of wool exports in 2008/09 were:

Greasy Wool: $5.50 per kilogram Scoured Wool: $6.81 per kilogram Carbonised Wool: $7.17nper kilogram Tops: $9.98 per kilogram (no longer produced in Victoria)

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TERMS OF REFERENCE 1. The Necessary Criteria Used by Businesses to Transfer Offshore Manufacturing to Victoria

The principal criteria for the wool processing industry:

i. The cost of establishment and operating in Victoria. ii. How these costs compare with the cost of processing wool overseas. iii. Are there any incentives to establish here? iv. The cost and ease of access to water and effluent control. v. Productivity issues. vi. The quality of the product produced in Australia compared with that in other countries. vii. The need, or otherwise, to be close to the largest supply of wool in the world.

As stated above, Australia’s principal competitor country for early stage processing is China. China is becoming increasingly dominant as the world’s largest wool processing nation and as the principal destination for wool exports from all of the major wool growing countries. Early stage processing has either ceased or reduced in most other countries other than Uruguay.

While China is regarded as a low cost country which is difficult to compete with, the comparison is not as simple as that. Australia’s wool processors operate at world’s best levels of productivity and quality of output. But, in competing with China, it is not a level playing field as they compete against a Value Added Tax (VAT) regime that favours greasy wool imports (13% VAT) over those of scoured and carbonised wool (17%). The difference is equivalent to the cost of scouring or carbonising in Australia. It is an issue which has been raised with the Department of Foreign Affairs & Trade to include in its attempts to negotiate a Free Trade Agreement with China. ACWEP believes that in the case of wool processing, there is much more to be gained from working with the existing industry to ensure its sustainability. While not wishing to be over-protective, it is difficult to imagine what incentives could be provided that would not disadvantage existing participants and / or introduce over-capacity.

2. Identify and Report on the Factors which Influence Businesses in Determining Whether to Manufacture in Australia or Overseas, Including Consideration of:

a. The Retention of Intellectual Property Rights By and large, the retention of intellectual property rights is not a major issue in determining where to process wool. Early stage wool processing has a number of fundamental steps using equipment that is generally available in the public domain.

The skills which set companies apart are their enhancements to equipment and processes to improve productivity, lower costs and improve product quality.

b. Maintaining Consistent Quality Standards in Line with both Federal and State Laws Maintenance of product quality standards is a commercial, rather than a legislated or regulatory issue in the wool processing industry.

The principal legislated / regulated standards relating to the wool processing industry are those for effluent control. While the Chinese Government may disagree, anecdotal information clearly indicates that many processing plants in China operate with poor effluent control. However, there has been increasing emphasis on environmental legislation in China in recent years. It appears likely that this trend will increase, which will create problems for the scouring, carbonising and dyeing industries in China.

If these changes continue; and as China matures further in social and economic terms, this will place greater pressure on the Chinese early stage processing industry and create opportunities in other countries, including Australia.

However, with the current rate of decline of Australia’s early stage processing industry, it may be too late unless policies are introduced to ensure the continuation of a wool processing industry in Australia.

c. Probity Matters None of which we are aware.

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d. Assistance and Incentives Provided by Government Government incentives have encouraged the establishment of wool processing plants in Australia in the past 25 years, e.g. the former Geelong Wool Combing plant at Geelong, the Riverina Combing plant at Wagga Wagga in New South Wales and the Jandakot Wool Washing plant in Perth. A scouring plant established at Goulburn (NSW) in 1981 may have received some Government assistance also. All but one have closed and the other operates on much reduced throughput.

ACWEP believes that ongoing incentives and assistance would be better directed towards existing companies in the wool processing industry, e.g. in managing the cost increases arising from Federal and State Government policy responses to climate change. These are resulting / will result in increases in water, energy and waste management costs at a faster rate than manufacturers are able to achieve in price increases. This will be exacerbated if the proposed Emissions Trading Scheme (ETS) is set at rate which disadvantages local industry against its international competitors. In the wool industry’s case, the principal competitor is China, followed by India.

Government is well placed to assist manufacturing industries by its involvement in water and energy conservation measures and effluent treatment; and the development of technologies that can be transferred between competing companies and even across different manufacturing sectors. (Appendix 1 describes one such successful initiative).

Another positive initiative in the wool processing industry was Victorian Government investment in the creation of composting material based on the use of wool scouring effluent with Geelong Wool Combing. Geelong Wool Combing closed in 2003 and the benefit of the investment to the industry was lost when the technology was not transferred elsewhere in the industry. It is important for Government and industry to establish procedures to prevent a repeat occurrence.

Unfortunately, Member companies have sometimes found that the method of implementation of Government policy and strategies can lead to further costs. For example, when Members attended Information Sessions about the introduction of EPA Energy and Resource Efficiency Plans (EREPs) program, they were advised that it was expected individual companies would need to pay $50,000 to $100,000 in consultant’s fees to establish their plans / programs. Members are of the view that this could have been done at a much lesser cost by basing the reporting requirements of the Scheme around existing key performance data which they record as part of their business.

e. The Impact that the Global Deterioration in Economic Conditions in Recent Months will have on Future Decisions Regarding Manufacturing Locations Changes in the availability and cost of Credit Risk Insurance in Europe have been a major consequence of the Global Financial Crisis.

This has created a major problem for wool exporters trading with Europe as virtually all trade (including other industries) is on Terms (of deferred payment), which in turn require the exporter to take out Credit Risk Insurance.

Most trade with China is via Letter of Credit and does not require Credit Risk Insurance.

Consequently, Australia’s wool exports to Europe have fallen while those to China and India have increased during this period, e.g.:

* Exports to the two main European destinations comprised 8.9% and 5.0%, respectively of Australia’s wool exports in 2007/08. These figures had fallen to 1.9% and 2.9%, respectively on a month-by-month basis in July 2009.

* Exports to China and India comprised 64.1% and 6.1% of the total in 2007/08. It had moved to 74.0% and 11.3% in July 2009.

It is not possible to say whether these changes will be permanent or change when global financial circumstances improve. The most recent (August) Australian Bureau of Statistics export data show a slight lift in exports to Italy to 2.8% of total wool exports.

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OTHER ISSUES 1. Strategic Issues

To a large extent the current state of the wool processing industry is a consequence of changes which have been occurring over a period of time, e.g. the decline in production, the increase in the proportion of exports going to China and its preference for importing greasy wool only.

However, there are a number of strategic issues which also need to be considered:

Value Adding As mentioned previously, a local wool processing industry adds value to Victorian and Australian wool exports.

Biosecurity Issues Australia is only able to export greasy wool because of its freedom from certain “exotic” diseases, e.g. Foot & Mouth Disease (FMD).

Should Australia’s sheep industry suffer an outbreak of FMD or a similar disease, Australia’s customer countries would place a ban on greasy wool imports from the affected area(s). The only way of exporting such wool would almost certainly be to at least scour it first in Australia. The consequences of not being able to scour locally would be a loss of export income and lower prices for Australian wool because of the reduced market opportunities.

When the United Kingdom experienced an outbreak of FMD in 2001, China would not accept wool imports from there until 18 months after the outbreak was officially declared as over. Prices for wool from the United Kingdom remained depressed during that period.

Both Argentina and Uruguay have experienced similar problems to the United Kingdom and still export a large part of their wool in the scoured, carbonised or top form.

A small example of the potential impact of biosecurity issues is seen with Anthrax. Parts of Australia have occasional outbreaks of this disease. Australia’s wool exports to Thailand (and sometimes to other countries) are restricted to wool from areas that are known to be free of Anthrax. Fortunately, these outbreaks are generally short term and restricted in area.

Dependence of Some Countries in Importing Scoured Wool Some countries that import Australian wool, e.g. Malaysia and Thailand, do not have a local scouring industry and rely on the importation of scoured wool.

While this can be done via a third country, it is more efficient to scour it at the source.

Dependence of Australian Industries on a Local Early Stage Processing Industry There are a number of local downstream wool industries which rely on the local early stage processing industries. These include:

* Groups who may wish to bypass the local wool auction selling system and establish their own supply chain.

* Parts of the interior textiles industry.

Once again, this can be done via another country. But, it adds complexities to the process and to these companies’ costs

Will China Always Have This Dominant Position? This is also a difficult question, given China’s apparent commitment to dominating the world textile processing industry.

However, history indicates that change occurs over time. In the last 50 years, the United Kingdom has lost it once unassailable position as Australia’s dominant customer nation, being replaced by Japan, which in turn was replaced by the USSR and other Eastern European countries before the rise of China and the demise of Western Europe.

With the exception of Australia up to ten years ago, wool textile processing is now dominated by low cost countries, raising the question of how long China will remain a low cost country. Most of the countries which increased their textile production in recent years, e.g. Vietnam, do not have an early stage wool processing industry and may not wish to invest in one if they move into wool

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processing, creating opportunities for Australia’s early stage processors. As mentioned earlier, wool exports to Thailand and Malaysia go through early stage processing in Australia.

Environmental Issues Early stage, and some parts of later stage (e.g. dyeing) wool processing, are regarded as “dirty” industries. However, Australian wool processors have an enviable record in their management of environmental issues through:

* Water recycling. * Effluent management, either through ponding in extensive areas or by concentration in

more intensive areas. * Establishing alternate uses for effluent such as fertiliser. * Novel procedures such as the wetlands project in South Australia (Appendix 1).

It is not inconceivable that changing attitudes to environmental matters may see countries with greater population densities than Australia “export” their pollution problems to other countries. It is widely reported that China, although well known for a historical laissez faire approach to environmental issues, is now taking such matters far more seriously and new plant is required to meet strict environmental conditions. Similarly, China and India are moving to address other key workplace place issues such as occupational health and safety.

Australia is well placed to take advantage of any such moves to export environmental issues through its technology, access to land and closeness to the source of raw material.

2. What Will Happen if the Remaining Wool Processing Plants Cease Operations? There is little doubt that should such an event occur, the equipment would be sold to China and the current cost of re-establishment would prevent any replacement businesses commencing operations in the foreseeable future.

There would be a flow-on effect to dependent industries, lost opportunities within Australia and greater financial risk for Victorian wool growers should there be a disease outbreak which restricts wool exports to that of processed or semi-processed product only.

2. Access to Government Funding Members have had occasions to feel frustrated that Government funding appears disproportionately directed to new businesses. While the importance of attracting new business is understood and accepted, there are opportunities to improve the sustainability of existing businesses.

A recent example of this occurred with a Geelong based Member and access to the $24 million Geelong Investment and Innovation Fund that was available to businesses to set up manufacturing in Geelong with the anticipated closure of the Ford engine plant. He was told that his company was not eligible because they were not increasing their workforce.

4. What Might be done to Assist the Remaining Wool Processing Industry? Members of the Victorian early stage wool processing industry appreciate the changing nature of the local wool processing industry. They also understand that the Government places great emphasis on potential new businesses.

But, they also believe that there is a strong case for supporting (but not propping up) existing businesses which have the potential to contribute to the State’s future. The local wool processing industry has contributed greatly to Victoria and believes that it still has a role to play in the future. The Australian Council of Wool Exporters & Processors would be pleased to discuss opportunities that will provide greater assurance of its future and be beneficial to the broader community, e.g. further improvements to effluent management and reuse.

An excellent example of the potential for such co-operative work is the innovative work done by the South Australian based wool processing company Michell Pty Ltd (based at Salisbury) and the City of Salisbury in the treatment of effluent as part of the development of the Salisbury Wetlands, with benefits for industry and the community. More details are attached as Appendix 1 and are available at: www.aila.org.au/projects/SA/paddocks/docs/wetlandspaper.pdf.

http://www.aila.org.au/projects/SA/paddocks/docs/wetlandspaper.pdf

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Members advise that unsuccessful initiatives to establish a similar project were begun in Victoria with the consultants from the South Australian project. Anecdotal information is that the consultants did not proceed because of Government “red tape”. ACWEP appreciates that there are two sides to every situation. Nevertheless, whatever the reason, ACWEP believes that this project is a good example of what may be achieved with industry / Government cooperation.

Another issue which needs consideration is the differences in the way different Authorities charge for trade waste. This can be in both the parameter charged for and the rate of charging. For example:

* Barwon Water charges for Oxygen Demand are based on Chemical Oxygen Demand (COD) whereas City West Water charges on Biological Oxygen Demand (BOD).

* Both charge for Suspended Solids, but at different rates.

The lack of consistency in trade waste charges and the possibility that further distortions may occur in the future has the potential to favour operations in one region over those in another.

Peter Morgan Executive Director

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ACWEP SUBMISSION TO INQUIRY INTO MANUFACTURING IN VICTORIA 2009

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