A recently released report has predicted the rising price of gas will impact upon manufacturing and food processing industries across regional and rural Australia.
The Grattan Institute report said that domestic and international factors are affecting both supply and demand for natural gas, pushing up the price for users
One factor contributing to the rise technological advancements which have made it economically viable for Australia’s east-coast to export natural gas. The price of natural gas has been on the rise in international markets, which has attracted gas producers to move the supply from the cheaper to the more expensive market until prices converge. As a result, the wholesale price of gas will rise, and domestic gas users will pay more.
The report predicts that over time, the price is expected to peak and fall back somewhat, because increasing prices should lead to increased supply, either from higher-cost conventional sources that become competitive or from unconventional sources.
Political factors also play a part in the price rise. For example, Europe imports about a third of its gas from Russia, but political tensions may cause Europe to look elsewhere for a more secure supply – therefore pushing up demand.
For large gas-users, such as manufacturers, some cost pass through may be possible, but these businesses will otherwise absorb a relatively large cost or take the decision to replace existing equipment, which is can be a difficult capital investment decision.
Regional manufacturers, such as Kagome Australia will feel the impact of the rising gas price.
As Australia’s largest tomato processor, Kagome injects more than $24 million a year into the local economy.
Tomato processing requires a large amount of heat in the form of steam, and its production uses more than 280,000 gigajoules of gas a year, most of it from February to April. The cost of gas is significant, representing around 5 per cent of total costs.
Gas suppliers have advised Kagome Australia that its next gas contract will involve a gas price increase that could be as much as 100 percent.
Passing through costs will be hard, as Kagome Australia discovered when the carbon tax added around $500,000 to their annual operating costs, just as imports from places such as California became more competitive.
Alternative energy sources such as coal are cheap but produce pollution and are difficult to handle. LPG is even more expensive, electricity would require major reinvestment and biomass is logistically impractical.
The company’s managers are considering all their options.