Industry remains optimistic

Despite recent highly publicised factory closures, Australian manufacturing remains a half-glass-full type of industry as we go into 2014. Alan Johnson reports.

I’m very optimistic about the future of manufacturing in Australia – Willox (third right) at Ampcontrol’s Ringwood facility.

With high profile manufacturers, such as Ford and Electrolux, announcing they will be closing their manufacturing operations, it’s refreshing to know most manufacturers remain optimistic about their future.

According to Innes Willox, Australian Industry Group’s CEO, there are many reasons to be optimistic.

“I think manufacturing has a very strong future in Australia, but as in all things, it is subject to pressure and constant change.

“I’m very optimistic about the future of manufacturing in Australia, but that optimism has to be tempered by a couple of realisations, one being the fact that the sector has gone through some hard times recently, and has lost about 14% of its workforce since the first half of 2008, plus the industry has seen sustained pressure from a range of areas, pressure from the high dollar, increased import competition, sluggish consumer spending and a lack of business confidence, all impacting on the sector over the past few years.

“The industry has shown resilience to hang on, but those pressures remain and some parts of manufacturing will have to change shape to meet those competitive pressures, so there is going to be greater demand over time for high end, value added manufacturing, or manufacturing that is closer to market.

“Becoming world-leaders around innovation, training, leadership and skills are going to be crucial to the future of manufacturing,” Willox told Manufacturers’ Monthly.

Industry trending upwards

Willox said September and October’s PMI (Performance of Manufacturing Index) results of over 50 were very welcome news. (The index was 51.7 in September and 53.2 in October, which are both above the 50 point level separating expansion from contraction.)

“The stand out area for me was confidence, the one thing that has been lacking, as the industry has been under intense pressures from the strong dollar, high energy costs, uncompetitive unit labour costs and fragile demand in domestic and international markets. 

“The PMIs reflect the confidence looking forward in the hope that conditions will improve and confidence will return into the broader economy and that it will flow through to the sector.

“The growth in the PMIs doesn’t reflect the here and now necessarily, in terms of current orders, employment or production, rather they are signs of optimism, and optimism breeds optimism. Plus anecdotally, we are seeing signs of pickup, with member companies reporting significant orders,” he said.

Willox is optimistic the PMI will stay up in 2014, but says that will all depend on confidence turning into activity. 

“Hopefully we will see some signs of that over the next couple of months,” he said.

According to Willox, the recent federal election played a key role in industry’s confidence.

“The election was a big drag on the economy through the first nine months of the year, ever since it was called.

“It put a dampener on demand and on investment, because companies were waiting to see what happened in the election, before making decisions around investment. But once the election was out of the way, we saw a return in confidence,” Willox said.

Government change positive

As well as being optimistic about manufacturing’s future, Willox believes the change in government will have a positive effect on Australia’s economy and the manufacturing sector.

“We have had discussions with the new industry minister, Ian MacFarlane, about industry policy and putting in place the right settings.

“We believe we will get some policy stability from this government, and an expectation that ‘no harm’ will be done and that business can get on with doing business.

“I think the government is prepared to make the tough decisions needed. For example, they are in negotiations with the auto sector at present about its future and what support the government can and should give and under what circumstances they should be given. 

“But while the car industry is very important, manufacturing sometimes gets entwined with the auto sector, when in fact there is a lot of activity going on out there, particularly in that value-add manufacturing, integration into global supply chains,” he explained.

However, Willox admits some manufacturers need to change. 

“Australian manufacturers can’t compete straight out on cost, we have to compete on access to markets, innovation, after service and/or high end value add manufacturing and innovation. 
“To compete we need to find new and smarter ways to compete.

“If we can get our links with research institutions right, our R&D right and our innovative capacities right that will give us an enormous competitive advantage,” he said.

However, looking into his crystal ball, Willox expects the volatility of the dollar to continue to have a major impact on industry.

“It makes planning and making business decisions very difficult. Movements of a cent or so can be critical to businesses.

“The reality is Australia does not control the value of its dollar, we are at the mercy of others. It’s like a cork in the ocean as a result of that.

“We believe the dollar will remain relatively high, the best we can see is it in the high 80s for a time. But it will continue to fluctuate. 

“The other big issue that will emerge in late 2014 are proposed free-trade agreements especially the one with China, as well as Korea and Japan,” he said.

However, Willox says manufacturers will enter 2014 confident the carbon tax will soon be part of history. 

“It is very important that the cost is taken off manufacturing’s shoulders as quickly as possible and we get a least cost replacement.

“The carbon tax has cost industry hundreds of millions of dollars in money that could have been spent much more productively in terms of investment and employment creations.

“It has been a dead weight cost for industry and the sooner it goes the better,” Willox said.

Gas supply

Aside from the dollar, Willox says one of the key issues facing Australian manufacturers in 2014 and onwards will be the supply and cost of gas on the East Coast.

“Manufacturing is very reliant on energy, which was one of our competitive advantages, but now through electricity and now gas price increases, this will be a huge issue.

“Access to supply, and supply issues are going to be company defining issues in many cases.

“If we don’t get this right, it will have catastrophic consequences for Australian industry.

“The first problem is supply. The Ai Group surveyed gas users across NSW, Victoria, Queensland and South Australia earlier this year.”

“Of those who were looking for a gas contract one in ten were unable to get an offer at all; a third were unable to get an offer they considered serious – whether because of the volumes on offer, the contract term, conditions of supply or price; another quarter were able to get a serious offer, but from only one supplier; and only one third enjoyed multiple offers and the sort of competitive market for gas supply that we would like to see. 

“But with the imminent commencement of LNG exports from Queensland and a trebling of gas demand on the east coast, this can only mean an even tighter market.” 

Willox said the second problem, often considered a solution to the first, is rising prices. 

“The LNG boom has long been expected to lift domestic gas prices substantially, but this is happening even faster than many expected. 

“The survey confirmed that for those gas users who were being offered contracts, wholesale prices had risen from the long term average of $3-4 per gigajoule to more than $5 for short term contracts starting this year, and to nearly $9 a gigajoule for contracts over longer terms or starting later. 

“This is a huge transformation. It will take Eastern Australian gas prices from among the lowest in the world to among the highest. 

“Energy users’ costs would increase by around $5 billion a year. That’s more than the gross revenue the carbon price would raise in 2015-16, and comes without any compensation.”

Willox points his finger at the Commonwealth and the States who took the decision to allow the Eastern Australian gas market to be linked to the high-price East Asian gas market. 

“They should not escape responsibility for the unintended consequences.” 

For answers, Willox points to the US. “There they have a system in place to approve LNG exports to economies with which it lacks a free trade agreement. 

“Approval is not granted unless the Department of Energy determines it is the public interest. 

“It has already approved several; so this process is clearly not an investment-killer. 

“Neither is Canada’s equivalent approvals process, under which the National Energy Board determines whether a proposed export arrangement would leave adequate supply for foreseeable domestic requirements. 

“What these processes achieve is to provide important transparency, information and opportunity for discussion. 

“This ensures that major impacts are considered and debated ahead of time, not just when they materialise. 

“The process Ai Group proposes would see proposals for new and significantly expanded LNG production subject to economic approval by the Federal Treasurer, who would receive advice from an expert body – not unlike the Foreign Investment Review process.” 

Willox explains the expert body would make a published assessment based on input from all relevant stakeholders of three matters: 

• Whether approval would leave adequate gas supply for domestic requirements in relevant Australian markets over the life of the facility; 

• Whether approval is in the national interest, taking account of economic, strategic and social impacts of the proposed expansion; and 

• Whether opportunities for and net benefits of parallel supply to domestic and export markets have been adequately considered by proponents. 

“The National Interest Test could do a lot to help answer community doubt about the benefits of production. 

“In terms of governance and regulation Australia would be no less attractive than the US and Canada. Export and domestic uses of gas would genuinely be able to thrive together,” Willox concluded.