Dollar drags CSR over broken glass

The dark cloud that has enveloped the manufacturing and retail sectors in the past few years may have a tinge of silver in it.

A major factor in the stresses imposed on the non-resource sector has been the strength of the Australian dollar, which broke through parity with the US dollar nearly three years ago.

The combination of the dollar’s strength and weak domestic conditions has undermined the profitability of large swathes of the manufacturing and retail sectors and forced continuous restructuring and job shedding.

Today’s announcement from CSR of another restructuring of its troubled Viridian glass business, the closure of its Ingleburn plant in New South Wales and the loss of another 150 jobs is the latest in a very lengthy line of similar announcements.

In explaining the restructure CSR cited the "persistently high Australian dollar" and the downward pressure it had exerted on pricing. The strength of the dollar had enabled alternative import supply chains to be established which were now expected to be a permanent feature of the glass market.

It has taken some time, and the failure of the dollar to respond to the sharp falls in commodity prices last year, for Australian companies to accept that they have no option but to plan on the basis that the dollar will remain at elevated levels for some time to come and that there is no certainty that as the resources investment boom cools that they will gain any relief.

CSR also said the weak residential and commercial construction markets were at cyclical lows but were now forecast to recover at a slower rate than previously anticipated. The subdued, conservative mood of households and businesses and the fiscal constraints on governments at all levels makes a return to more buoyant levels of growth in the near term improbable.

The combination of the dollar, cautious consumers, capacity-constrained governments and technological change is creating the kind of pressure on trade-exposed businesses last experienced when the tariff walls started coming down in the 1970s and 1980s.

While there were fears that the winding back of the tariff protection to negligible levels would devastate manufacturing industry, and there was considerable trauma – as well as restructuring, plant closures and job losses – those businesses that survived emerged as far more efficient and competitive entities.

The dollar’s strength may be having the same kind of effect, forcing companies to look deeply at their business models and either change them or surrender the market to imports. There’s barely a day that goes by without an industrial company announcing a restructuring.

BlueScope Steel, for instance, took the dramatic and costly decision to exit the export steel business while its former BHP sibling, the re-named Arrium, has restructured its steel-making business with the ambition of running it for cash rather than profitability.

All three remaining car makers are having to reconsider the viability of their businesses. The oil refiners are permanently switching from refining products domestically to imports.

Retailers are having to change their business models and market positioning and are forcing pressure for change and greater efficiency through their supply chains. Media companies are having an analogous experience, pressured by the steep downturn in advertising revenues and the accelerating incursions of the internet into what had been oligopoly markets.

As with the tariffs, however, from a longer-term perspective there are some positives that will flow from all the bad news.

A weekend piece of economic commentary from HSBC said the dollar might be helping to fix Australia’s weak productivity growth of recent years by exposing local companies to fierce international competition. It referred to last week’s GDP numbers and said GDP per hour worked had picked up by 3.5 per cent year-on-year.

"While further government reform of the labour market and regulatory environment as well as improved infrastructure would help boost productivity, it seems market prices – in this case the floating Australian dollar – are already helping," it said.

It also said that it appeared that the effects of the big appreciation of the dollar in the past three years (its average post-float rate against the US dollar has been US75 cents) were starting to wear off as companies and households adjusted to the new level.

It may not be much consolation for the companies struggling to cope with the pressures the strong dollar has produced, or for the employees forced to look for new jobs, but the shakeout occurring in the non-resource sectors of the economy does, in the longer term, have some positives for both the companies and the wider economy.