The sprawling symbol of heavy industry, unionism and blue collar work has dominated NSW's Illawarra region for almost 100 years, and for some the cloud over its future hails the beginning of the end for Australia's steel industry.

Australian Workers' Union branch secretary Wayne Philips remembers the shock when BlueScope closed the site's No. 6 blast furnace in 2011. 

"That was a terrible day. It was panic stations. A lot of people went into early retirement. It takes a toll on you personally. There's nothing worse than having someone sitting in the chair [in front of you] and being emotionally and physically a wreck because they don't have a future," he says.

Philips started work at Port Kembla in 1979 but lost his job amid the heavy restructuring in the early 1980s. He then went to work for the AWU.

The union, which covers some 95 per cent of the "wages" employees at Port Kembla (as opposed to workers on contracts), is currently locked in enterprise bargaining talks with BlueScope.

Philips has played the game of wage negotiations many times, and while he thinks the company is using the threat of closure as a "bargaining chip", he believes the threat is real.

"This round of negotiations, the word I would use to describe it is 'bizarre'," Philips says.

"We are hearing too many things. They are making too many preparations to get out. People are extremely worried and there's nothing for them to go to if it does close."

When the No. 6 furnace was mothballed four years ago, 1000 direct jobs were lost.

Today BlueScope employs 3500 people at Port Kembla, a far cry from the glory days in the 1980s, when the four different train stations on the massive site took 22,000 workers to the steel works every day.

If the remaining No. 5 blast furnace was mothballed, up to 2000 direct jobs would be lost and thousands more contractors who depend on the site would be out of work.

University of Wollongong economics lecturer Martin O'Brien did two surveys of workers who lost their jobs in the 2011 shutdown, one six months after the closure and another 12 months after the first survey.

The profile of the average person taking redundancy was a 54-year-old male with just over 30 years of experience working at BlueScope.

Only 38 per cent were re-employed within six months, but some 50 per cent had found other work after 18 months.

However, Dr O'Brien says things were "very grim" for older workers and those from non-English speaking backgrounds.

"Unfortunately, those made unemployed in declining industries do not tend to possess the necessary skills for employment in growing service sectors, nor do they possess a high level of geographic mobility," he says.

Dr O'Brien forsees a range of problems if Port Kembla were to go through another downsizing or a complete shutdown. 

First, the mining boom that absorbed lost jobs during the 2011-12 redundancies is all but over in 2015, and unemployment in the Illawarra is more than 8 per cent.

Second, the cash that was thrown around to support jobs in the region under the Gillard Labor government, such as through the $30 million Illawarra Regional Innovation and Investment Fund, is unlikely to be forthcoming a second time.

The AWU's Wayne Philips says the majority of Port Kembla workers are over 40 years of age, and he worries the town will not bounce back like Newcastle did when BHP Steel closed up in that town 15 years ago.

"If you're over 45 it is bloody tough to get a job. Wollongong is a steel town. We're not like Newcastle, we can't absorb the impact into other industries. Not everyone can open a coffee shop or go to university," he says.

As a global steel glut weighs on prices, Australia's two steel makers, Arrium and BlueScope, are under pressure to boost returns from sub-scale businesses plagued by high energy and labor costs.

This week Arrium, formerly known as OneSteel, announced a blowout in its debt to as much as $1.85 billion and a $320 million write-down against its iron ore mining operations. The company has a market value of just $425 million.

BlueScope last week denied reports it is considering closing its remaining blast furnace at Port Kembla, but the steel maker said that its "costs of manufacturing steel are too high" and the company is "seeking a game-changing approach that will significantly reduce costs".

Some view BlueScope's comments as tough talk to deal with a difficult union. Others argue it is the first step in preparing the public for large-scale job losses.

BlueScope and Arrium are struggling. Shares in the two companies have plummeted 82 per cent and 43 per cent, respectively, in the past year and investors are demanding a focus on shareholder value.

Activist investment firm Sandon is one investor pushing BlueScope to improve shareholder returns by closing the blast furnace and importing slab.

The slab could then be used for the domestic manufacture of higher-margin painted and coated products such as Colorbond and Zincalume that can be made competitively in Australia.

NSW liberal MP Gareth Ward, parliamentary secretary to Premier Mike Baird and member for the Illawarra, says that steel making is important for his region, but it is also a matter of national interest.

"All levels of government need to support steel making. I don't think it is acceptable, from a defence capability point of view, for Australia not to produce steel," he says.

"I am never a fan of subsidies. But you can't just build a blast furnace overnight if there is a conflict. I am an economic rationalist, but I also believe in the need to defend our own country and that means being able to produce steel."

Ward's parents met at the Port Kembla steelworks in 1972. He says there is a similar story for many families in the Illawarra.

Port Kembla, which produced its first steel in 1928, is the nation's biggest steel plant, with capacity to make 2.6 million tonnes of raw steel every year.

Iron ore from Western Australia, and coking coal brought in from South 32's mines just a stone's throw from Wollongong, are fed into the huge No. 5 blast furnace to make the liquid iron that is fed into the slab caster.

Red hot slab, radiating heat, rolls continuously out of the caster and is left in the open for days, allowing it to cool before it is fashioned into rolled coil and plate products.

The vast open spaces of the industrial site, a symbol of the blue-collar manufacturing that has slowly left Australian shores, are almost devoid of workers, who nowadays operate the highly automated facility from the safety of control rooms.

As uncertainty washes over Port Kembla, there is a feeling the real decision about its future will made in Canberra.

The Abbott government's decision to stop subsidising the car making industry has fuelled concerns the economic dries in the Coalition have no appetite to support steel.

Federal Minister for Industry and Science, Ian Macfarlane, says the government believes traditional industries can survive and prosper beside the industries of the future.

"Maximising competitiveness is a priority for all companies operating in a global market, and the Australian government is working to ensure the economic framework is in place to maximise investment and innovation in Australian industry," he says.

"There is no doubt the steel industry is an important contributor to the national economy and is particularly important to the Illawarra."

Debate about the future of Port Kembla is, in part, a tale of the broad shifts in both the Australian and the global economies.

China's rapid urbanisation over the past decade drove a boom in steel-intensive infrastructure investment.

The surge in demand for steel-making raw materials, iron ore and coal gifted Australia a once-in-a-generation mining boom.

But the spike in commodity prices put a rocket under the Australian dollar, decimating the competitiveness of BlueScope and Arrium against imports, at the same time they were paying very high prices for raw materials.

"It is a sad situation, where I see both of our steel companies really struggling and it goes to the challenge we have in Australia to be internationally competitive," Dr Bob Every, chairman of Wesfarmers and Boral says.

"We've come out of the other end of a resources cycle where we've got high wages, high energy costs and industrial relations that, unfortunately, have gone back about 15 years."

Every was the president of BHP Steel before the mining giant demerged both OneSteel and BlueScope, after which he was chief executive of OneSteel until May 2005.

"I'm not a protectionist, but frankly, I'd be very sad if we didn't have a steel industry," Every says.

"As I reflect on the demerger [from BHP] that took place in 2000, once you took the steel companies away from being in the same company as iron ore and coal, we gave those companies a strategic weakness."

China itself rushed to build steel plants to supply its own frantic construction of railroads and skyscraper during the boom years, and it now produces half of the world's steel.

As China's economy has slowed, iron ore and coal prices have dropped and the Australian dollar has eased significantly against the US dollar.

But the mass of new steel plants has led to a new problem: excess global supply and depressed steel prices.

Bank of America Merrill Lynch estimates there will be a 6.5 million tonne surplus of steel exports in 2015.

While Wollongong contemplates the loss of Port Kembla, the future is also uncertain for the nation's other blast furnace, Arrium's Whyalla steel works in South Australia.

Arrium, which produces 1.2 million tonnes of raw steel a year at Whyalla, is scrambling to repay its debts amid weak steel prices and as the collapse in iron ore prices hammers its mining business.

There is a view that Arrium has only kept Whyalla running because it cannot afford to mothball the facility.

"All assets have a finite life and need to be replenished at some point," Arrium chief executive Andrew Roberts says.

"A blast furnace has an average life of 25 years. The last time we did a major refit was in 2004, so in essence, the asset life is through to 2024. That is 10 years away and as we go forward we will have to review it."

Mr Roberts says it is important for Australia that it has two strong steel companies, but Arrium needs to continue to cut costs in its steel division if it is to remain viable.

A big part of the problem is the fact that Australia's demand for steel is insufficient to absorb its own production. 

BlueScope makes money on steel dispatched domestically, but it loses in the order of $100 million a year exporting 500,000 tonnes of surplus commodity steel.

"There are huge economies of scale in industries such as iron and steel and we just don't have a sufficient domestic market," University of Wollongong professor Simon Ville says.

"Labour costs and the costs of production are too high. We are in the ironic situation where we export the raw material and import the finished product."

The impending end to local car manufacturing will further hit local demand from 2017.

The need for greater domestic steel use will be a key focus for the AWU. The union intends to launch a campaign asking the Australian government to commit to using 40 per cent Australian steel in all of its construction projects.

"The Americans have guaranteed use of American steel on US government projects. That [in Australia] would save the industry," the AWU's Philips says.

While everyone agrees that losing the Port Kembla works would be a huge blow for the Illawarra, there are some who believe its importance has diminished.

Wollongong Lord mayor Gordon Bradbury says that the days when the steel industry supported the entire "food chain" of businesses in the Illawarra are gone.

"To lose 3500 jobs would be dramatic. For me and for many it is an iconic part of the Illawarra, but it is not the be-all and end-all of Wollongong these days," he says.

"BlueScope is facing challenges to continue to produce raw steel. It is well understood we are vulnerable to market forces. [But] there are opportunities with the diverse role of the port, the university and the coal sector."

About 205,000 people live in Wollongong and another 65,000 in neighbouring Shellharbour.

In many respects, the University of Wollongong represents the beacon of hope for the city.

UoW now has some 27,000 students in Australia and in 2011 the university estimated its total contribution to gross domestic product was $1.12 billion.

Some already like to think of Wollongong as a university town, not a steel town.

In partnership with BlueScope and other steel industry players, UoW's steel research hub is already trying to find the products of the future that Australia can make competitively.

"We all know that manufacturing has to change in this country and the steel hub is a prime research tool to make that happen," Professor Judy Raper says.

Raper says she is optimistic about the future, but if worst comes to worst and Port Kembla is shuttered, she believes UoW has a key role to play in the adjustment.

"If you look at the long-term unemployed cycle, it is those with education who get out of it," she says.

thefinancialreview.com.au