EVEN before the global financial crisis hit, 2008 was already a rocky year for Australian manufacturers, with the first half marked by inflation and interest rate hikes as oil prices hit historic highs, food prices surged, and the Australian currency soared towards parity with the US dollar when it peaked in July.
At year’s end, it is a totally different story, with many of the issues experienced in the first half of the year reversed: oil prices have fallen sharply, interest rates have been reduced twice in a matter of months, and the Aussie dollar has plummeted over 30%.
The latest IBISWorld data on the top 100 manufacturers demonstrate just how tumultuous conditions have been over the past year or so, and for some, this will continue for some time.
Richard Robinson, senior economist from BIS Shrapnel, says manufacturing had actually started to improve in the last financial year before the global financial crisis, with total manufacturing output increasing by 4.2% throughout the year.
“Global demand for commodities and the domestic construction boom boosted the building materials sector, which included structural steel and metal producers as well as steel suppliers, so companies in these sectors experienced the strongest growth.
“Housing also started to pick up so industries supplying non residential housing and businesses associated with the mining boom did quite well, so this had a residual affect on the chemicals/metals and the non metal material products sectors which showed strong growth.”
BIS Shrapnel has forecast return to strong economic growth in the medium term, but only once the current period of ‘overdone pessimism’ has receded.
“One of the main casualties of the global financial crisis has been the loss of consumer confidence, with manufacturing growth said to slow down even further as people tighten their belts,” Robinson told Manufacturers’ Monthly.
Capital expenditure and research and development (R&D) look to be the first victims of the financial crisis, as finance and credit become harder to attain.
“There will be a new outlook on spending and if companies are nervous they will defer some of their capital expenditure which will particularly affect machine and equipment manufacturers who will also be suffering from downturn from overseas markets.”
Heather Ridout, CEO of the Australian Industry Group (Ai group) agrees and warns while conditions still appear healthy for some businesses, particularly those involved in mining, the real economy is yet to feel the full impacts of the global financial crisis.
“The slump in new orders in the manufacturing sector suggests there is a crisis of confidence arising from this period of uncertainty. Until this is resolved, we won’t be able to ascertain if the downturn in new orders is real or a symptom of extreme caution. The Federal Government’s ongoing response to the crisis and further Reserve Bank interest rate cuts are key elements to restoring this confidence.”
“Companies are revising their business plans, reducing employment, reducing costs and scaling back on investment. “An unfortunate casualty of this process will be a reduction in spending on research and development.”
However, Robinson believes there won’t be a total collapse of investment as there is still a bit of investment coming through from mining and the resources boom as well as infrastructure and transport.
“This growth will be driven in part by lower interest rates over the next year, although inflationary pressures from capacity constraints and labour markets will prevent interest rates falling back to the low levels seen earlier this decade.
“All things being told, with a slower demand for exports and domestic demand weakening GDP won’t go negative. “We’ll get a slowdown, but I don’t think it’ll go much below 2%. Our guess is that it will stay around 2.5%.”
Senator Kim Carr, Minister for Innovation, Industry, Science and Research said while the signals are mixed, he believes manufacturing was hit hard by the global financial situation even before it escalated into an economic crisis.
“There’s no doubt the crisis is having widespread and growing negative impacts across the economy, as Ai Group’s recent Survey on the Global Economic and Financial Crisis illustrated.
“However, there are some positives with the sector showing great resilience in tough operating conditions.
“In 2007-08 we saw new records set for industry value added ($104.7 billion), company profits ($29.4 billion) and exports ($88.4 billion). Automotive products were our largest single manufacturing export – up 20 per cent on last financial year, and ahead of traditional commodities such as wheat and wool. This is despite the Australian dollar approaching parity with the US dollar.”
“In an interesting sidelight, the sector reduced its energy consumption in 2006-07, despite increasing production – which suggests it is already responding to the climate change challenge,” Carr told Manufacturers’ Monthly.
Closer to home, rising unemployment and the skills shortage are said to continue to be issues for industry, with BIS Shrapnel predicting that the slowdown in investment and consumer spending, combined with a boost to productivity from prior investment will push the unemployment rate above 5% by the second half of 2009.
“However, as renewed residential construction drives momentum in the economy and GDP growth strengthens again from the forecast 2% in 2008/09 to 2.25% in 2009/10, the unemployment rate will drop back to current levels of close to 4% by 2012,” Robinson said.
A lack of skilled labour continued to be a drag on the manufacturing sector this year according to Ridout, who stressed there is still a need for Government and industry to work together.
“Collaboration is the key to providing better training options for current and potential employees, and to positively promote employment in manufacturing.
“The other major issue this year has been climate change and the Federal Government’s proposed response to that in the form of the Carbon Pollution Reduction Scheme. This scheme, which is expected to take effect in 2010, will bring a significant shift in how the Australian economy operates and many manufacturers have been grappling with the potential implications of that scheme.”
Looking forward to 2009, though it will be a rocky ride for most manufacturers, Carr, Ridout and Robinson all agree that businesses are already responding actively to the challenges experienced in 2008, but Ridout says lot depends on the Federal Government’s actions over the next few months.
“It has already introduced a large stimulus package aimed at low and middle income households and first home buyers. The effectiveness of this package will need to be monitored very closely over coming months.
However, serious consideration may need to be given to additional measures. We expect to see unpredictable consequences on industry and individual businesses as a result of the crisis and these will require flexible and adroit policy responses if investment and jobs are not to be lost.”
Carr says manufacturing is here to stay and to attract investment the Australian Government recognises that they will need to provide certainty in these uncertain times.
“There is no question that Australia will feel the effects of the global downturn, but that doesn’t mean we should just sit idly by and let events unfold.
“Our aim must be to make Australian manufacturing stronger and more sustainable – not just for this year or next year, but for the long term. Together, I’m confident that we can do it.”
Machinery & Equipment
Arguably the hardest hit industry by the current global financial crisis, machinery and equipment manufactures have really been doing it tough in 2008.
The major automotive manufacturers have consolidated a slowdown in new vehicle sales by closing plants as the expense of hundreds of jobs.
A broader slowdown in local and world economies combined with nervous credit providers withdrawing from the market, threatening further job losses in the automotive market.
Official VFACTS data released earlier in the year by the Federal Chamber of Automotive Industries (FCAI) show that 79,105 cars, trucks and buses were sold in October – down 11.4 per cent (10,184 vehicles) compared to the same month last year.
Year-to-date, new vehicle sales are down 0.9 per cent compared to the same period last year with a total of 864,037 vehicles being sold.
FCAI Chief Executive Andrew McKellar said these figures confirm that the global financial crisis is having an impact on broader economic activity, including the new vehicle market.
“While it is clear that current economic uncertainties have affected consumer demand, the industry is also monitoring the impact of liquidity constraints on the availability of wholesale finance to dealers,” he said.
“The industry is working systematically to find alternative solutions to this issue in an effort to avoid the risk of further disruption to the market.
“The most recent interest rate cut was well justified and will hopefully go some way to rebuilding confidence in the marketplace,” he said.
All other segments recorded decreases during October with passenger vehicles down 13.8%, SUVs down 19.1% and heavy commercial vehicles down 15.9%.
Toyota retained the top sales position in October with a market share of 23.6%, followed by Holden with 12.9% and Ford with 10.8%.
Earnings have also been hurt by the surging yen against the euro and the U.S. dollar, which lowers the value of foreign earnings when they are repatriated.
Japanese car maker Toyota profits plunged almost 69% in November after the company announced in October it expected its operating profit this financial year to be down A33.4 billion from the previous year.
Toyota is expected to sell about 8.3 million vehicles this year – excluding affiliates Daihatsu and Hino – down from 8.43 million in 2007.
On a more positive note, Toyota has enjoyed fast-growing sales in its fuel-efficient vehicles, as the car industry comes to terms with a dramatic shift in consumer preferences as motorists switch to more fuel-efficient and environmentally friendly vehicles.
Increased sales from its fuel efficient vehicles is said to put the Japanese car maker on course to overtake General Motors as the world’s top-selling automaker.
Non-Metallic & Mineral Products
It has been a time of volatility, uncertainty and rapid change for companies in the housing and construction market over the past year, mainly driven by the spectacular decline in US housing activity and protracted period of under-building in Australia which was compounded by the dramatic decrease in the Australian dollar towards year’s end.
Building materials group Boral derives about 20-30% of its income outside Australia, and with the US market experiencing its worst decline in housing activity for 25 years, the company experienced a significant decline in offshore earnings, with the US business delivering a loss of A$27m in the year 2007/8, which included a A$37 million loss in the June 2008 half of the year.
Rod Pease, MD of Boral said while conditions over the past year have been extraordinary, with the company’s entire portfolio of businesses in Asia, US and Australia feeling the impact of higher input costs including record-high energy and fuel prices, there are strategies in place to respond to these challenges.
“Our strategies include focused price strategies, comprehensive cost management programs, rationalisation of production to match sales demand, prioritisation and phasing of capital expenditure and disciplined focus on cash and capital management,” Pease said.
“Boral is relatively well positioned in terms of our cash flows and balance sheet. During 2007/08 we focused on improving cash management, with cash flow from operations up by $100 million to $582 million in 2007/08. Stay-in-business capital expenditure was contained to 70% of depreciation and this discipline will be maintained in 2008/09.”
Increased volumes in local construction materials has helped to offset some of the global pressures, with Boral’s revenue for the year ended 30 June 2008 6% higher than the prior year at $5.2bn, with this trend expected to continue during FY2009.
“The reduction of interest rates and improvements in October to the First Home Owners Grant will over time significantly improve housing affordability but these initiatives will not favourably affect our Australian businesses until well into 2009. We expect that building product profits for the full year will be significantly below the prior year.
“Whilst there is considerable uncertainty and assuming that the US dollar exchange rate averages around 70 cents for the year, we expect Boral’s profit after tax for the full year to be around $200 million. First half earnings are expected to be around 40% of full year earnings.”
The benefits of significant price and cost improvements are also expected to be greater in the second half.
Food, Beverage and Tobacco
Global food prices, domestic weather patterns and fluctuating exchange rates have had a strong impact on many companies in the food and beverage sector, contributing to a decrease in sales over the past year.
Kate Carnell, CEO, Australian Food and Grocery Council told Manufacturers’ Monthly with the backdrop of a global economy under stress, there is no doubt that 2007-08 has forced the food and beverage manufacturing sector to confront complex new realities.
“The sector faces higher fuel prices and the realistic prospect that we will have a new ‘tradable’ commodity – carbon.
“The proposed Carbon Pollution Reduction Scheme, the increasing price of oil, the rapid rise in the price of agricultural commodities and the impact of bio-fuels on food prices were just a few of the issues generating pressure on manufacturing companies.”
“Increasing demands for certain food crops to meet liquid fuels demand has seen wheat prices triple over the last year. In Australia this was exacerbated by water shortages caused by drought, both of these issues have had an impact on the sector.”
According to Carnell, a key issue for industry going forward will be corporate responsibility for both manufacturers and retailers.
“Much of the industry’s future success will rely on being able to embrace sustainability. This will be undertaken in collaboration and cooperation with governments, related industries and other stakeholders to achieve mutually beneficial outcomes.”
“Increasingly how and where our products are sourced is now as important as basic food safety – these concepts are merging. They are creating critical tensions which we have to confront.”
“Consumer expectations of the responsibilities of corporations is continuing to increase and being a demonstrably good corporate citizen is fast becoming a license to operate.”
Metal Products
Compared to the other industry sectors, metal product manufacturers in Australia seem to be fairing relatively well in the face of a looming global economic recession.
The economic malaise in the US and Europe has continued and is causing a drag on profits and sales for most manufacturers.
While in the last few months of the year revenue growth was strongly affected by fluctuating raw material prices and a weaker US dollar, as well as slowed demand from once-hot markets such as China, Brazil and India, on the bright side, prices for metals and minerals still relatively high historically speaking.
Aided by the resources boom and a strengthening housing sector, global aluminium producer Alcoa of Australia was the top performer of the metal producers in 2008.
Alan Cransberg, MD of Alcoa Australia said the company knows how to be competitive in a lower metal price environment and said the weakening Australian dollar is assisting.
“Alcoa is responding to the current global economic upheaval by continuing to focus on our efficiencies and operational costs, reviewing capital expenditure, and engaging all of our people to continue to look for improvements in how we run the business.
“We respond readily to business challenges and we are a strong business with good people, prepared to weather this storm.”
Another challenge for the aluminium producer is the significant implications under the proposed Carbon Pollution Reduction Scheme.
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“Let me start off by saying that Alcoa is fully supportive of the introduction of an Emissions Trading Scheme that supports greenhouse solutions and Australian jobs.”
“We have made enormous improvements in emissions reductions, down by 33% from 1990 levels, and we have the industry’s leading research and development outfit in WA. We’ve developed carbon capture technology, we implement new suggestions and technological developments continually to improve our greenhouse performance, and it’s all publicly documented. Apart from the need to operate sustainably for the environment, we need to do it for our bottom line.”
Paper & Wood Products
It has been a challenging year for packaging manufacturers with the global financial crisis heavily impacting on this labour intensive sector already challenged by low wage competitors and rising commodity input costs.
The performance of key industry player Amcor, who predominately supplies the food, beverage and healthcare markets, was relatively defensive in times of slowing economic conditions.
It has been reported that in the financial year ended June 2008, the company’s operating earnings fell by over 10% to A$657m on sales down 14% to A$9.3 bn.
Ken MacKenzie, Amcor’s MD, at the company’s AGM said in the company’s PET Packaging operations, volumes for the custom container business for the first quarter were slightly higher than the same period last year, but said given the current economic slowdown in the US, it is hard to forecast demand and earnings for PET operations over the next six months.
“The business continues to reduce it’s exposure to the carbonated soft drink and water segments and, consistent with this strategy, volumes in these segments were lower.
“Across the North American beverage segment, customers had a strong inventory build going into the summer period. Beverage sales however were lower than anticipated through this period due to a combination of cooler weather conditions and a slowing economy. This resulted in the industry reducing inventories during the first quarter.”
Despite unpredictable volumes across a number of product segments, particularly the ‘ready to drink’ beverage segment affect by the new taxes on pre-mixed alcoholic beverages, MacKenzie said Amcor Australasia’s non-fibre business continues to perform satisfactorily.
“In summary, for the group, trading during the first quarter for some of the businesses has been impacted by difficult global economic conditions resulting in lower than anticipated volumes. Offsetting this, the weakening of the Australian dollar will deliver a significant benefit in the reported earnings.
“Our sensitivity to the movement in the Australian dollar is approximately $3 million of additional profit after tax for every one cent downward movement against the US dollar and approximately $2 million of additional profit after tax for every one cent downward movement against the Euro.
Further, the recent fall in the oil price will also have a positive benefit in the medium term via reducing input costs.”
Petroleum, Coal and Chemical Products
While 2007 was a year of structural change for the petroleum sector, 2008 has been one of extremes for the industry, which has seen the price of oil fluctuate madly between $60 per barrel to $150 just in a number of months.
In a year that Belinda Robinson, Chief Executive of APPEA, has described as ‘surreal’, the global financial crisis, uncertainty surrounding the shape and impact of an Australian carbon emissions trading scheme, as well as an unexpected taxation hit of $2.5bn on the North West Shelf joint venture, meant for much of 2008, the industry held its breath.
“Oil production continues to fall while natural gas is being discovered at a rate much faster than it is being produced providing Australian with a much needed large economic and cleaner energy strategic asset.”
However Robinson cautions, like with most industries, the upstream oil and gas sector is being affected by the financial and oil markets volatility.
“Capital raising is difficult which is particularly affecting the small to medium sized enterprises. The most significant trend has been the growth of the coal seam gas sector and the high level of interest around producing coal seam gas for export in the form of liquid natural gas (LNG).
“There is a significant amount of work to be done in making sure that regulation for the use of the water produced as a by-product from CSG extraction is used to provide community benefits.”
Though 2009 looks to be challenging, Robinson says there will be some positives, with more clarity expected around the design of an emissions trading scheme.
“The length and breadth of the impact of the global financial crises, the strength of the Australian dollar and the oil price will play a major determining role in the shape of Australia’s oil and gas industry as we emerge from 2009. The level of contraction of the industry will be an area to watch.”