Seeking parity

Ross Taylor joined Fletcher Building as CEO in November 2017. Previously CEO of UGL, an international engineering, services, construction and product manufacturing business. His proven experience in improving performance and shareholder returns and working with decision-makers at the highest levels in Australia and New Zealand gives him a detailed understanding of the carbon challenges that confront the construction sector.

“New Zealand has got to stay efficient, but you also want in-country manufacturing of critical items.”

On the topic of carbon, he says that Fletchers emits approximately 1.8-2 million tonnes of carbon per year. And when you unbundle that, he says, 600,000-700,000 tonnes of that comes from cement manufacture in New Zealand, and another 600,000-700,000 comes through the power the company uses in Australia.

In his personal view, he thinks it’s both appropriate and important that Fletchers has committed to the Government’s, and the world’s, settings in aiming for well under the 2% target, which means reducing the company’s emissions by 30% by 2030. However, the issue as he sees it is that New Zealand should take care not to isolate itself on that agenda and allow products that are not being produced in this way to come into New Zealand untaxed.

“It needs parity or you’ll penalise anything produced in the country, and then everyone will just move to buying it out of the country.”

“The Government can quite legitimately put taxes around carbon and other incentives to drive innovation, but it needs to ensure parity, or it will just penalise anything produced in the country–and then everyone will just move to buying it offshore.”

CEMENTING THE PROBLEM

Cement production is a great example, he says, as it is really in the crosshairs.

“Cement is about 8% of the world’s carbon load – 70% of that carbon comes from the chemical reaction in manufacturing cement, and the rest comes from the energy required to make it. So, if I look at where Fletcher Building is in New Zealand, we have roughly 20% less embedded carbon in the cement we manufacture locally than what gets imported now.”

“We use roughly 20% less embedded carbon in the cement we manufacture locally than what gets imported now.”

“There are two reasons for this 20% advantage. One is the source of power and the other is our own efficiencies. New Zealand has a large proportion of hydro power which provides a simple and natural advantage. On top of this we have implemented numerous improvements at our manufacturing plant progressively over the years, and we are just about to take that further by using two-thirds of New Zealand’s waste tyres as an alternative fuel. Once collected we will shred them and burn them in our main kiln, reducing the amount of coal that is used.

“Incidentally, when you burn tyres, it is a high-temperature incineration; so high that you don’t get any emissions or toxins off it. The kiln is so hot that it completely consumes everything. Obviously in this day and age there is no way that a council would ever let you have a stack of tyres with burning black smoke. Nor would we want to do this! So, this is quite different. It is very high temperature combustion and very clean. It delivers something very important for New Zealand: firstly, it displaces the carbon load in the power we consume, and secondly, it cleans up a major waste issue in terms of how to reuse the tyres.

“The other reason our cement carbon content is lower is that Fletchers doesn’t have to transport the cement to New Zealand by ship. Cement is heavy and needs to be shipped here over long distances. You have to get it into the country, whether that is manufactured cement or cement clinker, which then gets ground into cement.”

BEWARE UNINTENDED CONSEQUENCES

What gets problematic, he says, is if the Government starts taxing the company here in New Zealand with carbon taxes and not taxing imports in the same way. Effectively those costs will make Fletchers uncompetitive, which would force the company to import.

“So, what you’ll end up doing is moving the most decarbonised cement out of the market and moving the problem offshore – making the global problem worse. It’s a fake saving.

“Therefore, one of the challenges is how do you drive New Zealand to decarbonise, which is entirely appropriate to do, while doing so in a manner that is fair and doesn’t result in hollowing out your local manufacturing sector, with all the downstream impacts that entails, and the emissions problem is simply displaced globally.”

This has driven a considerable amount of communication between the company and the Government, he says.

“We have contributed in detail to the Government’s review in this area, and we have been quite specific around it. At the end of the day you need enough business and scale to keep manufacturing in New Zealand. Our cement plant in Portland, near Whangarei, provides a lot of jobs up there, and we make multi-year investments. A carbon tax without parity puts uncertainty into those operations, the large number of people we employ, and those investments, so we have made submissions and suggestions around how best to implement these targets.

“We are supportive of carbon taxes, but only if imports are taxed for their embedded carbon on the same basis we are in country. If this doesn’t happen, it will become increasingly difficult to stay competitive and support New Zealand based manufacturing.

“If you think of New Zealand from a sovereign risk perspective, you want efficient and competitive industries, you want to be able to feed yourself, and you want a manufacturing base that supports key industries. It’s important to keep a credible base level in country, so New Zealand has to be very thoughtful as it pushes down the carbon tax road and drives carbon reduction forward that it doesn’t hollow out what it has left. This is an emerging issue across many industries.”

THE GREAT KIWI TRIAL MARKETPLACE

Governments should not look at companies that have scale with suspicion, he says.

“You need a level of scale to compete with competitors that manufacture and produce products internationally in much larger markets where scale is easier to achieve. Keeping larger New Zealand based companies efficient and competitive is the key.”

The settings to achieve this are already in place in New Zealand – there are no tariffs and no antidumping provisions – which he says, “keeps things very competitive.”

“If we get the settings right and don’t compromise local businesses’ ability to compete, there is a unique opportunity to innovate and lead the world.”

“Given an environment which forces industry to be competitive already exists, you have got to be very careful how to apply carbon taxes or you will get unintended consequences that you will regret in the future. You may find you have hollowed out local industry and made the world’s carbon load worse by shutting down lower carbon in-country manufacturing.

“The flip-side is interesting and more important – if the Government gets the settings right and ensures parity with imports when the carbon tax is introduced, you will really focus New Zealand companies on innovating and coming up with exciting technologies that can potentially be world leading.

“Again, if I stay with cement and look at where decarbonisation of the cement chemical process is going, one of the most proven and positive-looking technologies is the introduction of pozzolans as a cement alternative. These are made from volcanic rocks, which New Zealand has a lot of. If we get the settings right here and we don’t compromise local businesses’ ability to compete, there is a pretty unique opportunity to innovate and invest in these technologies and drive the local industry to be world leading.”

This, he says, is because New Zealand is an attractive market to trial products and technologies for global players as it is both a developed and sophisticated country, but you’re not trying to crack a large and hugely complex market.

“In the cement space international technology players see Fletchers as very attractive to work with – we have scale in this market, we are vertically integrated through the full value chain, and we can make the cement, turn it into concrete and then place it in buildings and roads. This means we can both prove the technology, get it specified, get the standards aligned with it, and get people to use it. Again, it creates a huge opportunity for New Zealand to innovate if we get the framework right.”

A BIG CHALLENGE: RISK-AVERSION

Ross brings up the issue that the building industry is very risk averse and slow to change, which is why small companies are sometimes hesitant to bring in a new product or innovation from overseas.

If a building owner tries it and it doesn’t work, it can be very difficult to get the problem solved as the product is internationally sourced and a small local company really can’t stand behind it. It becomes safer to use products they know they can rely on, from manufacturers they trust and who have robust service in the event something does go wrong. By contrast, he says that large New Zealand companies like Fletcher Building are uniquely placed to innovate and stand behind what they are doing as they are both substantial and local.

“With Fletcher Building you’ve got a large local business with a material balance sheet innovating and sourcing world leading technologies, and yes, we need to make sure we get it right, but with us standing behind it with local service and support, the customer can have a lot more comfort in adopting the new technology.

“This is another reason to ensure enough scale companies remain domiciled in New Zealand across the various sectors.”

In conclusion, Ross says that it is easy – and yet a big risk – to get lost in the carbon debate on its own.

“We don’t have many scale industries left here, so we have to be careful as we drive carbon out of the economy that we don’t hollow out New Zealand industry. It isn’t a black and white choice – carbon reduction or local manufacturing. We can have both, we just have to be smart about how we get there.

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