Friday, April 26, 2013, 10:19
Strong Oz dollar manufactures woe
By Karl Wilson

Strong Oz dollar manufactures woe

The aluminium plant of Alcoa at Point Henry in Victoria, Australia. Last year, the future of 600 jobs at Alcoa’s Port Henry smelter became uncertain after the company announced a review, saying high costs and the exchange rate meant it was no longer profitable in the ‘foreseeable future’. (AFP)

Australia’s manufacturing sector has been in slow decline for years but since the end of 2011, it has been a free fall, thanks largely to the high Australian dollar.

Over the last 20 years or more, the Australian economy has been riding high on the back of the resources boom triggered by China’s growth.

This gave rise to what economists describe as Australia’s two-speed economy — resources and the rest.

Manufacturing, once one of the pillars of the Australian economy, has been in decline for decades.

Today its share of the national economy is less than 7 percent, compared with 30 percent in the 1960s.

One of the key factors behind the fall has been the strong Australian dollar, coupled with high interest rates and the country’s triple-A credit rating.

The Australian dollar has traded above parity with the US dollar since 2011 and no one expects to see it come down, at least not in the short term. In 2008, it was trading at around 60 US cents.

On the trade-weighted index, the Australian dollar recently hit a 28-year high against the US dollar.

Its strength has forced many manufacturers to close their doors, slash jobs and relocate production overseas, spurring fears of rising unemployment.

In denial mode

The government and the Reserve Bank of Australia are in many ways in denial about the impact the high Australian dollar is having on manufacturing.

Minister for Climate, Industry and Innovation Greg Combet chooses to call it a structural adjustment right across the economy.

“There are statistics and statistics but if you have a look over the last 12 months, jobs in manufacturing have actually grown,” he says.

But outspoken federal MP and strong advocate for the manufacturing sector, Bob Katter, is not convinced, saying manufacturing is on the brink of total collapse.

“It’s only a matter of time before it ceases to exist altogether in Australia,” he says.

Holden, the Australian arm of US auto giant General Motors, announced it was slashing 500 jobs from its manufacturing operations in South Australia due mainly to the high Australian dollar which has led to a flood of cheap imports, especially from Japan.

 “The Australian automotive industry is heavily trade exposed,” says Mike Devereux, Holden’s chairman and managing director. “The appreciation of the currency means that making things in this country is 60 percent more expensive than it was 10 years ago.”

Devereux says that with the Australian dollar at its strongest in more than 30 years, despite significant productivity gains, Holden is witnessing a structural shift in the Australian market which favors importers.

“Not only are we challenged to compete locally, but high volume export opportunities are not possible due to the strength of the Aussie dollar and the measures other countries take to fiercely protect their own local automotive industry,” he says.

Two of the country’s biggest beef producers have warned that the industry is fast becoming unsustainable.

Hughes Pastoral Group chief executive Peter Hughes and Acton Land and Cattle Company founder Graeme Acton told The Weekend Australian newspaper high debt levels, spiralling costs and a lack of progress in free trade deals were driving away generations of families.

“Our costs in Australia are two to three times what they are in America. (If) we think we can survive with that cost structure around our neck, we are living in a fool’s paradise. The way the situation is at the moment, in a pretty short time there won’t be many in it,” Hughes told the paper.

Asked whether policymakers should be doing more to address the high Australian dollar and its crippling impact on the sector, he said: “I’m amazed that they say they can’t do anything. We’ve got the highest interest rates in the world and with all the quantitative easing done around the world, all that money is flowing into Australia because this is the place they can make money.

“If they don’t do anything about it, there won’t be much left. What do you do, sit on your hands until there is no one left?”

The paper said that in Queensland — where both Hughes and Acton have their stations — cattle farmers are battling debt levels approaching A$9 billion ($9.2 billion). In the Northern Territory, there is a host of cattle stations that have been on the market for extended periods with no buyers.

In an interview with the Wall Street Journal, Reserve Bank of Australia (RBA) board member Heather Ridout said Australia’s manufacturers had to adapt to the strong dollar.

“If we can see a sustained upturn in investment... we might say that we’ve made the adjustment, but I don’t think that is necessarily apparent yet,” Ridout, a former head of the Australian Industry Group, an umbrella group for business, told the paper.

“Manufacturing has been facing very, very strong headwinds with the currency staying high for a sustained period. The pressure to reduce costs is going to be unrelenting on the industry.”

Revival strategy

Seeking to revive the non-mining parts of the economy, RBA has cut interest rates by 1.75 percentage points since late 2011; the cash rate target now stands at 3 percent.

Though activity in areas like property and consumer spending has strengthened this year, RBA has repeatedly described the recovery in non-mining investment as tentative and said there is scope to cut rates further.

Ridout’s comments contrast with those of John Edwards, her colleague on the RBA board, who told the Journal recently that the manufacturing sector is coping well with the high Australian dollar, and no policy response from the central bank is required.

Manufacturing, which once accounted for a quarter of all Australian jobs, today represents less than 10 percent of the workforce, according to government data.

From small to large manufacturers, the story is much the same.

Packaging giant Amcor has shed around 15 percent of its 5,000-strong workforce in the past five years.

Amcor’s managing director, Nigel Garrard, says the high Australian dollar and cheap imports are to blame.

But Sue Morphet, executive chairman of industry umbrella group Manufacturing Australia, said recently: “Manufacturing in Australia doesn’t need to be a sunset industry although it does have significant challenges.”

In an interview with ABC, she said though not all manufacturing is going to be successful in Australia, correct policies and building appropriate skills can still encourage investment.

Morphet’s appointment, however, is not without controversy.

As CEO of the troubled Pacific Brands group she axed 1,850 jobs and moved production to China.

National secretary of the Australian Workers Union, Paul Howes, believes the government should do more for the manufacturing sector which employs five times more workers than the mining sector.

“There is no silver bullet to the crisis in manufacturing, but we need a comprehensive plan to take the sector into the future,” he says.