Australian manufacturing: recovery and restructuring – where is the growth?

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Australian manufacturing has staged a small but extremely welcome comeback in 2016, after suffering a sustained period of shrinkage since our most recent peak in 2008. This partial recovery has been evident across a number of key industry-wide metrics:

  • Ai Group’s Australian PMI® indicated mostly expanding activity since July 2015 to January 2017 with only one month of contraction (August 2016). This included the longest positive run of Australian PMI® results since 2007 (July 2015-July 2016). The index finished 2016 strongly, despite some weaker results around August, and continues to register growth in early 2017.
  • Manufacturing value-added output improved by 0.5% in the June quarter of 2016 but eased by 0.1% in the September quarter. After declining for seven consecutive quarters to March 2016, output growth may be recovering for manufacturing. However, manufacturing output remains 15.6% lower than the previous peak in June 2008;
  • Manufacturing employment (in trend terms) recovered by 60,900 people in the year to November 2016, after losing 174,000 jobs between 2008 and 2015 (17% of its 2008 workforce);
  • Aggregate corporate profits for manufacturers recovered in the June quarter of 2016, lifting 5.6% over the year, but eased slightly in the September quarter 2016 (-0.1% p.a.). Despite this recent easing, manufacturing profits (in nominal terms) remain at their highest level since 2011;
  • Manufacturing capital investment spending (CAPEX) strengthened in the June quarter 2016, to be up 8.3% from a year earlier, however CAPEX declined in the September quarter, down 6.9% form a year earlier (at $2.1bn, it remains well short of the $3.0bn to $3.5bn that was typically being spent per quarter by manufacturers from 2005 to 2011); and
  • The latest estimate of expected CAPEX in 2016-17 indicates that manufacturers plan to invest only a touch less this year than they did last year (-1.5% to $8.4bn for 2016-17 compared to $8.6bn in 2015-16).

This partial recovery is all the more remarkable because it is happening even as Australia bids farewell to the automotive assembly sector, which has arguably been the lynchpin of Australia’s advanced manufacturing and engineering activities for at least 70 years. The exit process for auto assembly is not yet complete, with production set to continue at Toyota and GMH into the second half of 2017 and up to 30,000 people still directly employed in their auto assembly and local supply chains.

So why is this recovery happening? What is driving it? Feedback from manufacturers in our Australian PMI® and from other sources indicate that the contributing factors include:

  • The lower Australian dollar, which is making it easier to export and to compete with imports across a range or product classes. This decline in the dollar (especially when compared to the prolonged and difficult period of trading above parity against the US dollar from 2010-13) is probably the single most significant swing-factor; recent research by Ai Group suggesting that AUD values of 75 cents or below providing the ‘sweet-spot’ at which exports of most manufactured goods can reasonably compete;
  • Increased interest and awareness of export markets among Australian manufacturers as a result of key trade agreements being finalised, including with China. While these agreements may not yet be facilitating easier and cheaper trade per se, they appear to be stimulating interest in exporting and willingness to attempt to crack new markets;
  • Increased demand for Australian manufactured goods from key Asian markets and especially China, due to rising demand from middle-class Asian consumers for products of higher quality, efficacy, reliability and trustworthiness than may be available locally;
  • Increased demand for manufactured building materials and other products that feed into local residential construction, due to the strong upswing in the home building cycle that is happening across Australia, but especially in Sydney and Melbourne. Residential construction typically carries a ‘long tail’ of demand for related goods and services, so this extra building activity is a boon to a number of manufacturing and other sectors;
  • A partial recovery in global commodity prices and especially black coal prices, with the RBA index for global commodity price index (in Australian dollars) up around 45% in January 2017 from the recent trough of December 2015. In particular, bulk commodities prices (spot, AUD$) increased 92% over the year to January, included in this are key exports of coal and iron ore. Regarding the outlook for commodity prices, Analysts at HSBC recently explained: “Commodity prices are expected to be supported by continued solid demand, due to ongoing growth in infrastructure investment, particularly in China. Demand is also expected to be supported by greater fiscal spending by the Trump administration and a general shift towards greater use of fiscal policy to support growth in Europe. On the supply-side, Chinese reform is motivating a reduction in excess capacity in the coal and iron ore industries, and the recent OPEC agreements to reduce supply should support a tightening in the oil market”; and
  • The lift in commodity prices is enabling Australia’s miners to resume their maintenance programs and to upgrade plant and equipment, some of which had been delayed over the past year. This is, of course, mainly benefiting manufacturers who supply or maintain plant and equipment for the miners, or who are involved in resources processing or transport. It is also bolstering regional economies.

More importantly, where is this recovery happening? And how can we keep this positive momentum going?

As at January 2017, the growth segments of Australian manufacturing can be roughly divided into two large groups.

First, the ‘consumables’ and ‘consumer-oriented’ products, which collectively now make up around a third of our manufactured output:

  • Food products, e.g. confectionery, snack foods, dairy, baked goods, prepared meals
  • Beverages, e.g. wine, beer, soft drinks, bottled water, energy drinks
  • Pharmaceuticals, vitamins, health supplements
  • Toiletries & cosmetics
  • Medical appliances, devices and equipment

These products are benefiting from: the low dollar; growing demand from middle-class Asia; growing demand from ageing populations; growing awareness of the importance of product quality, safety, efficacy and reliability; established trust in Australia as a reputable producer; verifiable supply chains; access to high-quality agricultural and other raw ingredients; and growing product ranges due to new technologies, production methods and product types.

All of these factors can and should be actively promoted and marketed by business, industry and Government. New products, production methods and technologies must also be more actively fostered by business, industry, Government and the academic sectors if we are to get serious about innovation, collaboration and competitiveness that is not cost-based.

The second growth trend is centred around specialised and advanced construction, engineering and industrial applications:

  • Specialised, scientific and technical machinery and equipment
  • Transport parts and equipment other than cars, e.g. trucks, trains, buses, caravans
  • Building materials and components including wood, steel, glass, ceramic & others
  • Building and surface treatments, e.g. paint, adhesives, coatings

These products are benefiting from: the low dollar; growing demand from the booming local residential construction sector; resurgent demand from Australian and international resources developments; growing awareness of the importance of product quality, safety, efficacy and reliability; established trust in Australia as a reputable producer; access to highly skilled employees and excellent engineering education facilities; growing product ranges due to new technologies, production methods and product types.

Are you a manufacturer? Does this Blog match with your experience and your outlook for 2017? Start a conversation by leaving a comment below.

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Julie Toth
Julie is Ai Group’s Chief Economist, producing economics research, comment and policy for Ai Group and its members. She has over two decades of experience in Australian public policy and economics research, working across the public and private sectors. Prior to joining Ai Group, Julie held senior economics roles with the ANZ Banking Group, the Productivity Commission and other Federal Government agencies.

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