Australia is losing its ability to manufacture basic materials, with recent plant closures spelling the end to local production of polyethylene and the industrial gas helium, while the future of Australian nickel refining is in doubt.

The government’s new manufacturing strategy, outlined last week by Treasurer Jim Chalmers, will include a ‘national interest’ stream of public funding ‘where domestic sovereign capability is necessary to protect our national security interests or ensure our economy is sufficiently resilient to shocks.’

There is a case for intervention to save Australia’s last manufacturer of polyethylene, the Chinese-owned company Qenos, but it is probably too late. Qenos appointed administrators last month, with its petrochemical plants at Altona and Botany likely to be demolished to make way for real estate development.

A spokesman for industry minister Ed Husic told media that the government was ‘actively monitoring the situation’ and what it meant for workers and potential impacts on supply chains.

The failure of Qenos was precipitated by high gas prices and by the 2021 closure of Exxon Mobil’s Altona refinery, which deprived it of its main source of a feedstock, liquefied petroleum gas.

The Chinese state-owned National Chemical Corporation (ChinaChem) bought Qenos from Orica and Exxon in 2005, intending to use it as a base for exports, however the Australian business has struggled over the past few years. Its 2022 financial statements showed accumulated losses of $760 million.  Days before the administrators were called in, ChinaChem sold the business to a property business, Logos.

The closure is expected to bring an end to the scale recycling of plastics in Australia, and will also have a significant effect on downstream manufacturers of plastic products across a wide range of industries, ranging from insulation, ducting, synthetic rubber, food packaging and moulded and engineered plastic goods.

Australian Industry Group chief executive Innes Willox said the Qenos failure reflected the erosion of key pillars of Australia’s industrial landscape.

‘The causes and consequences of Qenos’s closure are wide,’ Willox said. ‘A whole range of industrial and commercial products depends on the flow of resources and materials between oil and gas producers, refiners, chemicals businesses like Qenos, intermediate manufacturers of products like food and beverage packaging, and downstream users like food processors. Any house in Australia will have multiple polyethylene products in it.’

A shortage of feedstock gas was also behind the decision by industrial gas group BOC to close its Darwin helium plant in December after 13 years of operation.  The plant was Australia’s only producer of helium, which is an essential gas in welding and has a wide range of industrial applications.  The plant was also a significant exporter.  Australia will now have to import all its helium.

The former Coalition government intervened in 2021 to stop the closure of the last two Australian oil refineries, offering subsidies to Viva in Geelong and Ampol in Brisbane.

This reflected the national security imperative of retaining a domestic capability to produce diesel fuels, following the closure of Australia’s other four refineries since 2011. However, there has been no matching policy for important downstream products.

The erosion of Australia’s industrial capacity to produce basic materials has been underway for years, arguably since tariff cuts in the mid-1970s and early 1990s, which resulted in the loss of much of the country’s textile and clothing manufacturing, along with raw material inputs like wool scouring and cotton spinning.

Another critical point was BHP’s decision to shut its Newcastle steel works in 1999, after it concluded it could not compete with much larger and more modern plants in Japan and South Korea.

Bluescope, which purchased BHP’s remaining steel assets, is still profitably producing steel, but it shut Australia’s only tin mill at Port Kembla in 2006. In 2011, it shut one of its blast furnaces and coke ovens at Port Kembla, along with its hot strip mill at Hastings in Western Port Bay. Australia can no longer manufacture stainless steel or tinplate.

The aluminium industry has also been contracting. Since Alcoa closed its rolling mills at Geelong and Yennora in 2014, Australia can no longer make flat aluminium products, ranging from sheet-metal for shipbuilding to aluminium foil.

The future of refined nickel production in Australia is also under threat, with the closure of the $2.2 billion Ravensthorpe mine and processing plant announced last week, while BHP has flagged that it is considering mothballing its Australian nickel operations.  Clive Palmer’s Yabulu nickel refinery shut in 2016.

The value added to the Australian economy by manufacturing peaked in 2007-8 and has since dropped by 10 percent. The latest national accounts showed manufacturing had fallen from 8.3 percent of GDP in 2007-08 to just 5.2 percent which, according to World Bank figures, ranks Australia 140th globally, alongside countries like Kiribati and Albania. The average manufacturing share among developed economies is 13.9 percent.

The economic force driving manufacturing’s decline is the far greater profitability of resources and services sectors. That force is too powerful to be reversed by government subsidies, however there is an urgent need for appraisal of what remaining basic supplies need to be preserved both for the sake of national security and as the essential foundations for downstream manufacturing.

With its Future Made in Australia Act, the government is giving itself the legal tool to make interventions.  So far, the attention has been on a ‘moonshot’ investment in quantum computing, the aspiration to compete with China in batteries and solar panels and the high-risk subsidy of critical minerals processing plants, all covered by the legislation’s ‘net zero’ stream.  Saving the remnants of Australia’s chemicals and basic metals industries may be less exciting but could count for more in a national security crisis.

Supply-chain challenges continue to plague Australia despite the significant focus the problem has received in recent years. While the importance of supply chains to Australia’s economic prosperity is well understood, we are yet to come to terms with them as critical elements of sovereignty and national resilience.

We are currently experiencing a painful reminder of the need to adopt a more cross-sectoral approach to supply-chain resilience. Australia imports urea from China to use in making fertiliser. Urea is also the base chemical for diesel exhaust fluid, better known as AdBlue, an additive used in diesel to remove exhaust pollutants. However, China is diverting urea supplies into its own fertiliser production to keep fertiliser costs down and is directing AdBlue production towards addressing air-quality issues ahead of the Beijing Winter Olympics.

The transport sector in Australia has warned that the AdBlue supply is likely to diminish by February; the price of diesel has already risen 10 cents per litre in recent weeks. While AdBlue is an exhaust additive that doesn’t affect engine performance, many post-2010 vehicles will be forced into ‘limp’ mode if a fault is detected, effectively making them undriveable. Shortages of AdBlue will not only impact the transport sector through increased costs, but will have flow-on impacts for food production, availability and cost, as well as air quality. The impacts are expected to be felt across all supply chains.

It’s interesting to ponder for a moment whether a shortage of AdBlue could have been avoided. The fertiliser company Incitec Pivot has announced it will cease manufacturing urea-based fertiliser at its Brisbane facility by December 2022, stating that it couldn’t get access to a long-term gas supply from Australian producers. Could maintaining this facility have been the solution to the shortage of urea for AdBlue and fertiliser production?

These issues represent a convergence of factors that have a limited effect in isolation but, when combined, significantly impact sovereignty and national resilience.

The Productivity Commission’s July report on vulnerable supply chains, while not specifically mentioning urea, noted that ‘even though Australian industry might rely on imports of fertiliser and pesticides from China, the global trade data suggests that Australia could source these products elsewhere if trade with China was disrupted’. The report added the caveat that further expert advice was needed to ‘determine whether any of the inputs identified in this analysis are critical to production and whether critical inputs, such as fertilisers, are susceptible to other potential vulnerabilities’. It can be good to have a bet each way, but this one wasn’t helpful.

We faced similar challenges to those posed by the AdBlue shortage in 2020 with the availability of Covid-19-safe masks. The story is a little more complex in that it wasn’t the masks that were in short supply but rather an input into their manufacture. Non-woven polypropylene, a component of the masks, is produced by only a few firms worldwide and requires a high initial investment, thereby establishing a barrier to market entry and limiting the speed with which quick alternative production can be found.

The Khapra beetle, a destructive exotic pest that poses a major threat to Australia’s grain, dried fruit, rice and nut industries, provides another example. Last year, the beetles were found in a consignment of refrigerators that was imported in a single shipping container from Thailand. The fridges went to sites in New South Wales and the Australian Capital Territory. A second, more recent detection was in a consignment of highchairs imported from Italy. Tracing, inspection and treatment of the highchairs that were distributed to retail outlets and sold across Australia is still occurring.

Serious detective work by the federal agriculture department found that a shortage of shipping containers resulted in recycling across different commodities from different continents that, coupled with health bans on the use of chlorine and bromide to clean containers, led to cross-contamination.

These are examples of supply chains with single points of failure. It’s likely that others will continue to surface and many more will remain undetected.

Understanding the indicators of vulnerability and resilience from geopolitical, supply-chain, demand and dependency perspectives is key.

It is the confluence of these indicators that results in failure. It’s not enough to map sectoral, or even national, supply chains. We first need to appreciate the cross-sectoral characteristics of a ‘vulnerable’ supply chain. This starts with a deeper understanding of what a critical supply chain means beyond the Australian economy and as an enabler of resilience and national security.

We can’t wait for another problem to arise or divert resources into looking for the next issue. It starts with understanding what we value and what characteristics correlate to the vulnerabilities of those things we value.

Would we have intervened to support local investment if we understood the connection between AdBlue and gas supply to a fertiliser plant? Pre-Covid, the answer would likely have been no. Post-Covid, it should be yes.

Ulas Yildirim’s recent piece in The Strategist suggesting Australia develop the industrial capability to convert its abundant coal and natural gas reserves into liquid fuels to reduce its dependence on imports of the latter took me (way) back to the first research paper I wrote in my post-graduate studies. I looked at Nazi Germany’s desperate and ultimately unsuccessful attempts to compensate for its lack of oil fields by converting its coal into liquid fuels to run its war machine (I thought the title of ‘Oil toil foiled’ was quite clever, but my adviser wasn’t as taken with it for some reason).

With virtually no oil fields of its own, Nazi Germany had hoped to secure its oil supplies by capturing the Soviet Union’s oil fields in the Caucasus. Once that proved unattainable after the defeat at Stalingrad, Germany redoubled its efforts to build synthetic fuel plants using Fischer-Tropsch and hydrogenation processes. With the time and resources available, this approach fell far short of meeting Germany’s wartime demands. Moreover, in mid-1944 the Allies realised that the synthetic fuel plants were the key to dismantling Germany’s military capability and began systematic bombing of them.

After the first massive air raid, Albert Speer, Hitler’s minister for armaments and war production, immediately realised that the end was nigh. He noted, ‘Our one hope is that the other side has an Air Force staff as scatterbrained as ours’ and the Allies wouldn’t realise what their raids had achieved and would discontinue targeting fuel production. Hoping your adversaries are even more incompetent than your own side is not the best strategy, and it didn’t work for Germany; the Allies continued to relentlessly bomb the synthetic fuel plants, reducing their production faster than the Germans could restore it. In the end, Germany literally ran out of gas.

So, with that dramatic precedent in mind, let’s look at whether a synthetic fuel industry would provide Australia with energy security in time of crisis or conflict. Let’s first consider some of the relevant data.

Australia certainly does face substantial risk in its liquid fuel supply. It’s rather unfortunate for Australia that, while it is one of the world’s top three energy exporters, it is nevertheless heavily dependent on liquid fuel imports. If we take 2018–19 (which was the last ‘normal’ year before Covid-19 struck), domestic production was around 21,500 megalitres, but consumption was around 60,600 ML (or about 165 ML a day), so around two-thirds of our liquid fuel was imported.

Aside from the strategic risk, this creates a huge balance-of-payments deficit. Imports of refined and crude petroleum in 2018–19 were $38.4 billion and exports were only $11.5 billion, resulting in a negative balance of trade of nearly $27 billion, bigger than other major ‘deficit’ sectors such as motor cars and tourism. Aside from the strategic risk, keeping more of that money in Australia would be a good thing, particularly as China puts other Australian exports under a de facto boycott.

The technologies for synthetic fuel production are mature and there are examples of production done on commercial scale. The largest seems to be the South African company Sasal, which produces around 25 ML per day. That’s around 15% of Australia’s daily requirement, or 23% of our imports. So we’d need facilities around four times the size of the world’s largest synthetic fuel plants if we were going to replace all of our liquid fuel imports.

That would be challenging since the economics of global oil markets don’t favour synthetic fuel. One suspects that if the economic case were compelling, the private sector would already be liquefying Australia’s abundant energy resources. The volatility of the global oil market likely deters companies from investing in new enterprises with very large start-up costs and unreliable returns.

The uncertain future of carbon fuels is a further disincentive; the private sector is generally not keen to put new money into assets that will likely be stranded. In Australia, we’ve already seen that our electricity sector has reached the tipping point at which nobody wants to put their own money into building new fossil-fuel-fired generators. The federal government directed Snowy Hydro to build a $600 million gas-fired plant due to lack of private-sector interest. The situation is similar in petroleum refining, where the government is subsidising Australia’s last two refineries up to $2 billion over the coming decade to ensure they keep operating.

But there are alternatives to replacing imported liquid fuels with synthetically produced liquid fuel. And of course, Yildirim isn’t suggesting we replace all imported fuel with synthetic fuel. He notes that synthetic liquid fuel production based on coal or gas is only an interim step on the path to ‘100% renewables’.

It’s clear that if the challenge is to ensure national resilience and sustain the Australian Defence Force’s capability in time of conflict, then the long-term solution is to move more quickly down that path.

Again, if we look at the numbers, 17,600 ML of Australia’s 60,600 ML in consumption was in automotive gasoline and a further 29,600 ML was in diesel. So those categories represent 47,200 ML, or 78% of total consumption. Accelerating the take-up of electric vehicles for personal transport, trucking, agriculture and mining would massively reduce Australia’s dependence on imported liquid fuels.

While an adversary might try to blockade our liquid fuel supplies, it will be difficult for them to turn off the sun or wind. Considering the emphasis that the government has placed on developing a sovereign defence industry, it’s strange that it hasn’t pushed for greater sovereignty in our fuel supply by accelerating the take-up of electric vehicles. Even the most rusted-on supporters of coal-fired power would have to admit, we don’t need any imported energy to generate electricity. Generation and storage equipment is another matter and the government’s modern manufacturing initiative is aiming to make steps there. But, overall, it has been at best lukewarm and at worst openly hostile to electric vehicles.

Of course, replacing liquid-fuel-driven vehicles with electric ones will take time. But an increasing number of countries around the world are setting increasingly ambitious timelines to cease the sale of fossil-fuel-driven vehicles by 2030 or even earlier, and, as many commentators have noted, that will likely force Australia’s hand as supplies of conventional vehicles dry up or we become a dumping ground for outdated models. Granted, viable electric military and commercial aircraft are still further off, but Australia’s consumption of aviation fuel in 2018–19 was only 7,434 ML, or 12% of total liquid fuel consumption and far less than Australia’s current domestic liquid fuel production.

Virtually all analysts examining Australia’s supply-chain security agree that in light of the sheer scale of the challenges, multiple approaches to managing risk are needed. And they also agree that in many key areas we cannot simply rely on the market (the government itself has acknowledged this through its own interventions in the energy sector). So there may be a place in a multi-pronged approach to fuel security for some synthetic fuel production. Perhaps the government could partner with the private sector to establish a small plant that could produce enough to meet the ADF’s aviation fuel requirements, providing a price guarantee as it’s doing with refinery capacity. There are precedents in the defence sector—for example, in the subsidised production of propellants and explosives, though they do come with a significant overhead.

More generally, the transition to a post-carbon economy raises fundamental fuel-supply challenges for the ADF. As the civilian world moves towards a post-carbon future, it may seem like there will be less competition for liquid fuel and the ADF will enjoy bountiful supplies of cheap fuel. But it’s more likely to be the opposite case; as the world’s transportation systems electrify, the infrastructure for carbon-based fuels will atrophy as all links in that supply chain become increasingly uneconomical. At some point in time, liquid fuels will become ‘niche’.

What does that mean for an ADF that is used to relying on the civilian world for the supply and distribution of its liquid fuels? As the ADF doubles down on huge, liquid-fuel-reliant platforms such as infantry fighting vehicles, it may need to own more and more of that supply chain from well (or synthetic fuel plant) to bowser, increasing its logistics costs and challenges. Or it can choose a different path that will allow it to sustain itself on deployed operations without unwieldy, unsupportable logistics trains.

While Energy Minister Angus Taylor has highlighted that Australia’s ‘supply chain resilience has meant that during the Covid-19 pandemic, we have not faced shortages’, he, and the government more broadly, have also acknowledged that Australia needs to improve its resilience.

Covid-19 has ensured that the government is starting to consider the scope of the possible crisis, or crises, that may follow the pandemic. Central to this thinking are the implications of increasing strategic uncertainty in the Indo-Pacific—concerns outlined in the defence strategic update released by Prime Minister Scott Morrison yesterday.

These concerns are driving the government to focus on the resilience of our fuel supply chains to disruptions. There’s little ambiguity in the Morrison government’s commitment to ‘delivering policy and regulatory frameworks that support secure, reliable and affordable supplies of energy for consumers’.

But to do so, the government is going to have to solve some enduring policy challenges in a relatively short timeframe. In February, Australia only held 25, 20 and 22 days’ supply of petrol, diesel and jet fuel, respectively. These figures fall well short of the 90-day requirements Australia agreed to maintain in signing the International Energy Agency program treaty.

Our non-compliance with IEA requirements is not a new development. Until this year, the government had been all too comfortable that our oil companies’ near just-in-time supply chains could buffer us from the impacts of a sudden disruption to supply. It’s important to note that the risk-mitigation strategies that underpin the supply-chain arrangements of oil companies stocking Australia remain mostly untested. And it’s hard to argue that these supply chains won’t be susceptible to disruption during a period of sustained regional instability and strategic uncertainty.

On 22 April, Taylor moved to partially address the shortfall, announcing that the government would establish a national oil reserve. Australia spent $94 million to buy oil at a historically low price. Because of a shortfall in domestic storage capacity, the government made a deal with the United States to store Australian-owned oil in its strategic petroleum reserve, one of the world’s most cost-effective long-term oil-storage facilities. It’s a sound economic decision given the dramatic fall in global oil prices in recent months. But these arrangements fall well short of addressing our supply chain vulnerabilities and don’t build national resilience.

That’s why, on 15 June, the government released a request for information to identify opportunities to increase Australia’s domestic fuel storage capacity. While the request is open to all interested parties, oil companies are set to have the loudest voices. But should they?

The oil industry has argued that there are no significant risks or vulnerabilities in their supply chains. Perhaps, then, the oil industry isn’t particularly predisposed to providing innovative responses to this request.

The oil industry uses future-focused market profiles to support assessments of the commercial viability of capital investment in liquid fuel supply. Oil companies will endeavour to maintain a certain level of fuel stock in reserve and try to the best of their ability to make sure that supply meets demand.

But the construction of additional bulk fuel storage will not seem any more commercially viable to the oil industry now than at any other time. And it’s this calculation that has defeated previous efforts to improve bulk fuel storage in Australia. There’s little incentive for oil companies to absorb the not insignificant costs of building and maintaining bulk storage.

In fairness to the oil industry, no one wants to pay more for their liquid fuels at the metaphorical (or physical) pump.

The government’s policy mechanisms for encouraging infrastructure development are also ill-suited to addressing the challenge. The debt-based Northern Australia Infrastructure Facility, for example, wasn’t designed to fund this kind of nation-building effort. So far, Covid-19-prompted infrastructure projects appear to be mainly focused on roads. As we face a global recession, the government’s usual user-pays approach will be no help here either.

Australia’s $3 trillion superannuation sector could be the answer. It’s already a significant investor in Australia’s domestic infrastructure and, by its nature, is a long-term investor. If the government provides long-term certainty on fuel policy, including the necessary regulation, bulk fuel storage could be an attractive investment for the superannuation sector.

Superannuation industry investments could fund the construction of several bulk fuel storage facilities across Australia. As an added benefit, these facilities could end the fuel storage monopolies present in many of Australia’s major ports.

There are several models that could make this investment attractive to the industry. One could see the Australian government, like it has done with the US petroleum reserve, pay a fee to facility owners for long-term storage. Another could involve the Australian government mandating a minimum onshore storage requirement for the oil industry.

The Commonwealth could also invest equity, through superannuation funds, to develop the required storage infrastructure. This approach would likely be far more successful than the Northern Australia Infrastructure Facility’s debt-based model.

If oil companies were to invest in this bulk storage, their boards and shareholders would likely seek double-digit returns. A superannuation fund, especially one that’s looking after taxpayers’ money, would probably seek returns several percentage points lower. As an investor, the Commonwealth could factor the nation-building and national security benefits of the investment into its return-on-investment calculations.

Regardless of the model, someone has to pay for the additional cost of storage.

Covid-19 has created the opportunity to address many of Australia’s enduring security vulnerabilities and policy challenges. It has also created a once-in-a-lifetime chance to question many of the assumptions that have underpinned our policy decisions.

The answer to how we address the challenge of fuel security will likely require a paradigm shift in how we approach nation-building. At the very least, it seems clear that the government will need to look beyond the oil and energy sector to find a palatable policy solution to increasing our national fuel holdings.