2006 was a do or die year for many of Australia’s manufacturers. Read about the key issues, trends and predictions for 2007 by industry sector, including Food, Beverage & Tobacco; Metal Products and Petroleum, Coal & Chemical Products.
Machinery & Equipment
With the economy continuing to perform strongly, machinery and equipment manufacturers have generally done well, although those that launched investment programs several years ago are recording the best figures.
In the automotive sector, Toyota has marked itself as the strongest performer of the past year, with the production of vehicles reaching 110,000.
“It has been a good year for us, with the economy being stable and companies being willing to invest in fleet upgrades,” Toyota’s Peter Griffin told Manufacturers’ Monthly.
“The new model Camry and the Aurion have established good positions in the marketplace despite strong competition.”
Griffin notes that export performance has also been strong, with 80,000 vehicles being sold overseas.
“Things that were once luxury options are now required as standard, with no increase in cost,” he said. “That means that we have had to consistently improve our operational efficiency. That has been the story of the past year: the investments made several years ago in plant improvements, R&D and in robotics, is now producing productivity gains.
“We have seen an increase in staff levels, but the consolidation of plant operations under one roof in Altona and a better use of technology have been the major issues.
“Another area of improvement has been logistics, with more effective co-operation with suppliers, again the outcome of a comprehensive investment plan.”
The broader context for the automotive sector has been the steady pressure of tariff reductions and the intense competitiveness of the Australian car market. Nevertheless, Toyota is planning for a production target of 140,000 vehicles next year, anticipating a slightly improved level of broad economic growth.
“We can handle that level of production within our existing capacity, as long as we continue to improve efficiency,” Griffin said. “But our vision is to increase production to maybe 180,000 sometime in the coming decade. That would mean significant capital investments and expansion. On current trends, that is the way to go.”
Petroleum, Coal & Chemical Products
Soaring demand has meant solid growth across the sector, but inappropriate regulation is looming as a potential problem.
“The chemicals sector generally has benefited from the strong economic conditions both on the national market and internationally,” Michael Catchpole, CEO of the Plastics and Chemicals Industries Association said.
“Several major producers are running at capacity and report strong demand, particularly for plastic raw materials and specialty chemicals.”
Catchpole notes that strong international demand for petrochemical products has pushed up raw materials prices, meaning reduced margins for some Australian manufacturers. However the strength of demand has also ensured that overseas manufacturers in high-growth areas such as China do not have excess production capacity, and therefore import competition at very marginal prices has been limited.
But according to Catchpole, the picture for the plastics sector, especially the downstream fabrication category, is more mixed. “Some companies report export successes with innovative, high-value products, but manufacturers supplying into markets such as the automotive sector have been affected by tight margins, as well as the increasing trend for customers to source components from overseas.”
Catchpole identifies red tape as a constraint on the development of the industry, pointing out that the Banks Report on regulation impact recommended a Productivity Commission review of chemicals regulation with the aim of achieving consistent and effective regulation across all jurisdiction. The Council of Australian Governments nominated the chemicals and plastics sector as a regulatory reform ‘hotspot’, and decided to form a Ministerial Taskforce to oversee regulatory reform.
The Productivity Commission review is expected to begin early-2007 and will take at least 12 months; the Ministerial Taskforce has yet to meet and will not begin its work until early to mid-2007.
“At the moment, there are several areas of additional or increased regulation being proposed by government agencies,” said Catchpole.
“We hope that these proposals will not proceed until the Productivity Commission has at least conducted an initial assessment to ensure they meet the aims of national consistency and effectiveness, and that they do not duplicate existing regulation.”
Softness in the housing and construction market and rising input costs have been the dominant concern for the sector but most players are anticipating gradual improvements going into 2007.
Construction materials company Rinker Group has notched up strong figures in its international operations, especially in the US. Its Australian subsidiary, Readymix, is one of the top three Australian construction materials groups, and has performed well in the past year.
David Clarke, CEO of Rinker Group, points to research by BIS Shrapnel suggesting a 1.4% total lift in construction activity in the year ending March 2007, focused on engineering/infrastructure work. The Housing Industry Association forecasts a 1.1% rise in housing starts over the same 12-month period.
“Housing in Australia continues to weaken but there are indications, such as more first home buyers, that it may be bottoming. Meanwhile, commercial activity continues at strong levels,” Clarke said.
“Steep increases in raw materials, fuel, energy and transportation costs have been largely overcome during the year, either through operational improvements or higher prices. But further savings are needed to maintain margins where costs are not abating significantly.
“We expect cost pressures to continue in some areas, particularly fuel, energy and raw materials. Other costs, like ocean freight, did begin to ease from their peaks last year but they are volatile. For example, at the end of March 2006, rates were 24% higher than they were 12 months earlier.”
The overall message for Rinker Group in the past year, says Clarke, is of steady improvements in productivity offsetting increased input prices. He also points to investments made over the past few years as a key reason for its current strong position.
Some of the most important investments were ‘bolt-on’ upgrades in existing plants, but there have also been primary-level investments, such as a new aggregates quarry at Marulan, near Goulburn, to supply up to five million tonnes a year.
Food, Beverage & Tobacco
Many manufacturing companies in the food and beverage sector have felt squeezed in the past year, with input costs rising and increased competition from imports.
At the same time, the large retail chains are continuing their transformation programs and passing as many costs as possible down the production chain.
“The big retailers are showing better margins but many manufacturers are doing it tough,” Dick Wells, CEO of the Australian Food and Grocery Council said.
“What we have seen in 2006 is a continuation, and in some respects an acceleration, of structural trends. For smaller manufacturers in the sector, the pressure is to either get bigger through mergers or partnerships, or focus on a particular niche.”
Wells notes that supply chain reform has seen retailers increasingly move to a system of primary distribution, with manufactured goods picked up from the factory by the retailer. Retailers are moving steadily towards more ‘shelf-ready’ products, with packaging and presentation issues factored into the manufacturing process.
But the dominant market position of the retailers means that manufacturers are seldom able to increase their prices to cover their greater costs.
Wells also identifies regulatory complexity as an issue for manufacturers.
“Even when there is an obvious consumer demand, and manufacturers are ready to meet it, getting regulatory clearance is a frustrating business,” he said.
“Even something as simple as adding calcium to orange juice entailed an incredible level of difficulty. We are more than happy to comply with health and safety regulations, but there is a clear danger that the red tape involved can strangle innovation and industry improvement.”
Within the food sector, a key growth area has been for products which are healthy, ranging from bottled water to ‘lite’ dairy products. The ‘organic’ sector, while still considered a niche market, is continuing to show steady growth.
“We anticipate that general economic conditions in 2007 will be pretty good, and that is good news for food manufacturers, broadly speaking. But for smaller players, it’s not going to get much easier any time soon,” Wells said.
The broad environment for manufacturers of metal products has been strong throughout the year, although a few players have emerged as standouts.
Zinifex, with integrated mining and manufacturing zinc operations, has turned in strong results and sees few clouds on the horizon.
“Global demand for zinc products, particularly galvinising of steel, continues to grow,” Matthew Foran of Zinifex told Manufacturers’ Monthly.
“The big contributor has been China, which has gone from being a major zinc exporter to an importer.
“At the same time, zinc in concentrate, the raw material used in zinc metal production, has fallen behind, a legacy of under-investment in the industry over the past few years. But Zinifex, because we combine mining and manufacturing, kept up our investment levels, and that is paying off now.”
Foran points out that the current investment program includes further exploration around the company’s Century mine and facilities in Queensland, as well as the Roseberry site in Tasmania.
“The zinc metal market is continuing to grow, so we are improving plant efficiency and, where appropriate, expanding our capacity as well,” Foran said.
The main problem for Zinifex in the past year has been a shortage of skilled labour — although this is a problem across the economy, and especially for resource-related companies.
“We have had to be innovative in our recruiting, and we have been willing to cast a broad net both in Australia and overseas,” Foran explained.
“The key is that we see recruitment of good people, as well as the professional development of those we already have, as an investment rather than as a cost.
“But the problem of skills shortages has been more than offset by the good supply and demand fundamentals of the sector. We are moving 600,000t of zinc metal a year, and the question still is: can we meet the demand? All things considered, that’s a good problem to have,” Foran said.
Paper & Wood Products
Structural changes within the sector, as well as sharp rises in commodity input costs, have meant mixed results. The leading players, such as Amcor, are developing investment plans for the longer term, with the broad outlook steadily improving.
Louis Lachal, MD of Amcor Australasia, notes that Amcor’s global sales in 2006 were $11.4bn, up 3.1% on the previous year. However, the Australasian business had a difficult year, with profits down 16.9%.
“Corrugated box volumes were hit by general market softness and some specific industry issues, such as the impact of cyclone Larry,” Lachal said.
“Demand was also affected by continuing growth in returnable plastic crates, and by increases in manufactured goods and grocery goods being produced offshore.”
The company has announced a turnaround plan for the Australian corrugated box business, aiming to lower the cost base and improve operating efficiencies. The plan involves the closure of two corrugated box plants and a small paper recycling mill in Western Australia, and the establishment of a feasibility study for a new paper recycling mill at Amcor’s Botany site in NSW.
“Our Australasian flexibles business has undergone substantial rationalisation and re-capitalisation over the past 12 to 18 months, with four new printing/co-extrusion machines installed across three states, as well as two in New Zealand,” Lachal explained.
The company recorded good results in its beverage, food and aerosol can businesses, despite significant increases in the price of tin plate. The glass wine bottle operation in South Australia also had another strong year.
“We expect that business operating conditions will continue to be challenging throughout 2006-07,” Lachal said. “Beyond that, the business has substantial upside in the corrugated and flexibles operations, with new capital and improved operating efficiencies delivering a lower cost base.”