Pearls and Irritations

 The terms of privatisation included an anti-competitive restriction on the development of a commercial-scale container terminal at Newcastle, primarily to boost the sale price of Port Botany.

Everyone in Australia, and indeed beyond, has a stake in the successful transformation of Newcastle and the coal rich Hunter region of NSW. Why? Because in case you hadn’t noticed, it’s preparing for an unprecedented energy transition and laying the foundations for the jobs and industries of the future.

By necessity rather than choice, as I foreshadowed in Pearls & Irritations six years ago, the Hunter will become a prototype for the challenge of net zero emissions together with diversification of its industrial structure. This means emulating the planned approach of the Ruhr in Germany, with no net loss of jobs, as against Appalachia in the US, where entire communities were laid waste.

The Port of Newcastle (PON) has a pivotal role in meeting this challenge together with its regional community. It has contributed to the Hunter’s prosperity for 225 years, and will continue to do so, provided only that it is allowed the opportunity to take advantage of the changing patterns of global trade and energy production.

However, this ambition came very close to being thwarted by the privatisation of NSW ports in 2013-14, which was pursued by then Treasurer Mike Baird as part of an “asset recycling” program. The terms of privatisation included an anti-competitive restriction on the development of a commercial-scale container terminal at Newcastle, primarily to boost the sale price of Port Botany.

This secretly imposed restriction, known as the Port Commitment Deed (PCD), was to apply for a period of 50 years, with no legal prospect of removing it. At first denied by the NSW government, it was subsequently justified once it became public knowledge by a range of specious and contradictory arguments.

Effectively, the restriction ruled out a key driver of future growth and diversification in the Hunter region, as well as the wider benefits of ports competition for consumers and exporters across NSW. But the government soon found out that for the people and businesses of the region, if something is worth having, it’s worth fighting for.

Late last year, a private member’s bill secured the Port of Newcastle (Extinguishment of Liability) Act in the NSW Parliament. This set up a process for IPART, the NSW competition regulator, to assess the value of PON had the restriction not existed at the time of privatisation. If the port paid this amount as compensation, the legislation required the restriction to be lifted.

Port Botany claimed in its submission that the port would have been worth billions more without the restriction, despite previously assuring the Australian Competition and Consumer (ACCC) that a container terminal would not be viable. As we know, it is in the nature of monopolies, particularly poorly performing ones, to invent all kinds of stories to avoid competition.

In any event, IPART decided that with the passing of time and the overly optimistic forecasts for coal at the time of the sale, the difference in value would be $13 million, adjusted for inflation. This was a reasonable outcome in the circumstances.

PON paid the compensation amount and is at last free to develop a large-scale, deepwater container terminal, as promised and agreed by all levels of government when the BHP steel blast furnace closed 24 years ago, subject to the requirements of a State-wide policy review now underway.

Need for change

Currently, as the world’s biggest coal export port, 85 percent of PON’s business is coal. Mostly this is high grade thermal coal for use in power stations, with some metallurgical coal for steel-making. Coal shipments make up around half the port’s total capacity of 10,000 vessel movements a year.

Despite a recent spike in demand for thermal coal, largely due to the Ukraine war and China resuming coal imports from Australia, the future trajectory looks problematic. The world is moving away from fossil fuels to renewable sources of energy to achieve net zero emissions targets, with decarbonised supply chains.

Of course, the port will continue to export coal while there’s a market, but it recognises the need to change its business model or risk becoming a stranded asset. While the global energy transition may not have been anticipated when the steel plant was closed, the rapid expansion of container shipping was well understood.

With 95 percent of the world’s non-bulk commodity trade being moved in containers, island nations such as ours are particularly dependent on a competitive and efficient ports system. However, eastern Australia’s major container ports, including Port Botany, feature regularly in the bottom 10 percent of global port productivity.

We can now see how prescient it was for Newcastle’s civic leaders – business, unions and local representatives – to negotiate the deal for remediation of the blast furnace site as the State’s second container terminal. This would not only provide a boost to regional economic diversification but also be transformative for freight and ports efficiency.

And yet it was not to be for many years to come.

Despite the 2003 NSW Ports Growth Plan stating that “Newcastle will be the State’s next major container facility”, and despite Newcastle being the only port to offer deepwater access, rail connectivity and an adjacent intermodal facility, the remediated site remained unused, except as storage for imported wind turbines.

In other countries, when a large city outgrows its port, new ones are able, indeed encouraged, to challenge the incumbent. For example, the Port of Wilhelmshaven, formerly the biggest coal import terminal in Germany, will offer deepwater access to compete with Hamburg by attracting the new Ultra-Large Container Vessels (ULCVs).

Closer to home, the Port of Tauranga in New Zealand was established as a deepwater “growth port” to take pressure off Auckland. Rail connectivity, to minimise the use of trucks, and an adjacent intermodal, to avoid the double-handling that occurs when such facilities are distant from the port, have led to productivity almost 60 per cent higher than the Australian port average.

Similarly, the Western Australian government has just announced with minimal fanfare, let alone controversy, that a new container port would be built in the industrial region of Kwinana, yes you guessed it, to take the pressure off Fremantle. Being able to make decisions about future infrastructure needs on a State-wide basis is an advantage of public ownership, in addition to having much lower stevedoring fees.

However, even with its ports publicly owned, NSW governments saw no need to accept investment proposals for a second container terminal, as they were deluded into thinking Port Botany had many years to run before reaching capacity. Instead, they preferred to underwrite expensive Botany related rail projects, which still leave over 80 percent of containers on trucks.

Privatisation and beyond

This brings us back to the privatisation of the three major NSW ports with the Port Commitment Deed, which was designed to perpetuate the Port Botany monopoly on container shipping (together in a consortium with Port Kembla). It did so by requiring PON to pay a penalty of around $100 per container over a threshold of 30,000 containers a year.

In other words, if Newcastle developed a commercial scale container terminal which handled, say, a million containers a year, it would have to pay $100 million to its competitor. No wonder the ACCC was outraged, as well as with the way the NSW government and Port Botany sought immunity from their actions.

When I was appointed Chair of the PON Board in late 2017, I committed in the local media to a new strategic direction to “ensure a level playing field for the development of a viable and competitive container terminal” at Newcastle. This required us to overcome the PCD restriction, which was by then known to have been imposed without parliamentary approval.

However, a new NSW Freight and Ports Plan was devised in 2018 to side-step this egregious omission by institutionalising Port Botany’s monopoly position in government policy, in addition to the sale contracts. Further, the Plan stated that, “Port Kembla will act as a progressive overflow facility for Port Botany once its operational capacity has been reached”.

Estimates of capacity at Port Botany have varied wildly but are set officially at 5.4 million containers a year by 2040, when bottlenecks are already being experienced at the current level of 2.4 million containers. As a result, many exporters, especially in regional NSW, have diverted their shipments of containerised produce through Brisbane and Melbourne.

Economic modelling has demonstrated the positive impact a large-scale, high performance container terminal at Newcastle would have for future jobs and industries, both in the region and more widely. As the only deepwater port on the east coast of Australia, it would not only reduce costs significantly for users but also facilitate the growth of new industries, particularly in manufacturing.

These industries will additionally be turbo-charged by the port’s new Clean Energy Precinct, which has been nominated by the Commonwealth as the “hydrogen hub” for NSW, with $100 million to prepare the site and more to come to support investment partners in the $2 billion Hydrogen Headstart program.

Nor is this just about the export of hydrogen, which is of interest to Europe and north-east Asia, but also its domestic application in the production of green iron, green steel and even green aluminium. With abundant renewable energy resources, Australia is well positioned to take advantage of the green industrial transition, which is expected to be worth over $15 trillion by 2050.

Around the world, to meet net zero emissions targets, we are seeing countries increasingly demanding low or zero carbon products, in some cases at premium prices until production is scaled. For example, Europe’s new Carbon Border Adjustment Mechanism (CBAM), together with its Manufacturing-X initiative, will provide a “digital passport” for decarbonised supply chains.

Consequently, Newcastle has another chance to rebuild and reinvent its manufacturing capability, with the prospect of adding value to critical minerals and exporting knowledge intensive products to global markets. The result will be greater complexity and resilience for both the region and wider Australian economy.

This is the significance of the breakthrough which PON CEO Craig Carmody and his team have achieved in removing the handbrake on diversification of the port’s business model and securing co-investment in the region’s clean energy future. The potential cost of failure could not be contemplated.

After two decades of inaction and obstruction, it took six years of determined effort to prepare for a just transition for the Hunter region. While the delay was frustrating, other opportunities were identified along the way, such as green hydrogen production, a circular economy approach to the port’s operations and the prospect of electric vehicle imports.

Today, the future of the Port of Newcastle has never looked brighter, with the scope to invest in Australia’s most efficient large-scale container terminal, with deepwater access, and to deliver on our ambition to be a renewable energy superpower. However, there’s still a way to go to get to where we want to be.

The State government has commenced a review of the Freight and Ports Plan, which we hope will clear the path for investment planning approvals. And the Federal government’s “Future Made in Australia” initiative will help us to implement an integrated strategy for renewable energy and innovative manufacturing.

The Hunter has always been well placed to be a global exemplar of regional industrial diversification and energy transition. It is pleasing to report that we now have the best chance to make this happen.

 

You might also be interested to read the 2018 article from Roy Green in the Newcastle Herald: