Envy of World Economy Belied by Ailing Australia Industries

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Photographer: Jeremy Piper/Bloomberg

In a sign Australia’s economy isn’t insulated by the surge in resource investment, a government report yesterday showed unemployment rose last month for the first time since October.

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Photographer: Jeremy Piper/Bloomberg

In a sign Australia’s economy isn’t insulated by the surge in resource investment, a government report yesterday showed unemployment rose last month for the first time since October. Close

In a sign Australia’s economy isn’t insulated by the surge in resource investment, a government report yesterday... Read More

Photographer: Sergio Dionisio/Bloomberg

A worker walks past steel tubes arranged for delivery at the Orrcon Ltd. steel plant in the Unanderra suburb of Wollongong, Australia. Close

A worker walks past steel tubes arranged for delivery at the Orrcon Ltd. steel plant in the Unanderra suburb of Wollongong, Australia.

Photographer: Sergio Dionisio/Bloomberg

A worker stands in the Orrcon Ltd. steel plant in the Unanderra suburb of Wollongong, Australia. Close

A worker stands in the Orrcon Ltd. steel plant in the Unanderra suburb of Wollongong, Australia.

Photographer: Sergio Dionisio/Bloomberg

A truck transporting steel leaves the Shinagawa Refractories Co. Ltd. plant in the Unanderra suburb of Wollongong, Australia. Close

A truck transporting steel leaves the Shinagawa Refractories Co. Ltd. plant in the Unanderra suburb of Wollongong, Australia.

Looking out over aging warehouses in Unanderra, two hours' drive south of Sydney, 61-year-old Tom Folino-Gallo curses the strength of the Australian dollar as truck horns blare support for picketers at a nearby factory.

“The ripple effect is more catastrophic than the Japanese tsunami in this region,” said Folino-Gallo, owner of WGE Group, which supplies steel and cement makers. “This dip on the rollercoaster is the scariest I’ve ever experienced.”

Folino-Gallo’s worries reflect the divide in an economy that Treasurer Wayne Swan called the “envy of the developed world” a day before the government reported the biggest quarterly drop in employment for a decade. Australia’s mining boom, which kept the country out of the 2009 global recession, lifted the currency to a record last month, cutting profit at BlueScope Steel Ltd. and pushing companies such as toll-operator RiverCity Motorway Group into bankruptcy protection.

The Australian dollar touched $1.1081 on July 27 fueled by a central bank that this month considered raising the developed world’s highest interest rates to rein in resources-fueled inflation. Sustained currency strength would reverse a three- decade effort dating back to Bob Hawke’s 1980s Labor government to reduce dependence on agriculture and minerals and diversify an economy that rode “on the sheep’s back.”

Productivity

Reserve Bank Governor Glenn Stevens said the stronger currency, a decline in consumption and higher savings may be Australia’s new economic reality, and the only way for industries to cope is to reverse a decline in productivity.

“Everything comes back to productivity,” Stevens said in a July 25 speech. “It always does.”

An Australian government measure of labor productivity declined to 1.7 percent in the five years through 2010, from 3.1 percent a decade earlier, according to a report this year by Saul Eslake and Marcus Walsh of the endowment-funded Grattan Institute.

“The solution to some of the problems faced by industries suffering the side effects of the mining boom is higher levels of productivity,” Eslake said in an interview. When the mining boom ends, Australia will see a slowdown in the rate living standards improve at best and at worst “an outright decline in our living standards as we saw in a relative sense during the ‘80s and early ‘90s,’’ he said.

Rising Unemployment

In a sign Australia’s economy isn’t insulated by the surge in resource investment, a government report yesterday showed unemployment rose last month for the first time since October. The local dollar this week dropped below parity with the U.S. currency for the first time in five months as stock and commodity prices tumbled on concern fiscal crises in the U.S. and Europe will slow global growth.

Annette Beacher, head of Asia-Pacific research at TD Securities in Singapore, said the currency’s decline may present a buying opportunity.

‘‘The Australia dollar at parity is an attractive entry level for believers of the medium-term Asian growth story,” she said this week. “While short bonds are expensive, it’s best to express our view via extending duration by moving up the curve, remaining long bonds overall. We also remain of the view that the 10-year spread between the U.S. and Australian bonds can compress to +160 basis points by year end.”

Mining Windfall

Australia earns more than A$8 billion ($8.3 billion) a month from iron ore and coal exports, largely to feed mills and furnaces in China, and the new mines and gas fields in the west of the country have lured jobseekers from the factories and offices in the east. Even after the last quarter’s jobs decline, Australia’s unemployment level is 5.1 percent, nearly half the rate in the euro zone.

Near-full employment hasn’t given a lift to Prime Minister Julia Gillard, who is struggling for support of her agenda as popularity ratings sink to among the lowest of her year-old tenure.

“The labor market reforms the government has put in place are going the wrong way -- they actually reduce productivity,” said Gavin Stacey, chief interest-rate strategist at Barclays Capital in Sydney. The poor productivity means “you can’t use weak growth as an excuse not to raise interest rates.”

Meanwhile, Australia’s steel industry is losing A$2 million for every 1 cent gain in the local currency against the U.S. dollar. As the so-called Aussie jumped about 15 percent in the past year, the shares of BlueScope, the country’s biggest steelmaker, fell 59 percent.

BlueScope’s Struggles

BlueScope Steel expects writedowns in the year ended June 30 of about A$900 million, the company said in a statement late yesterday, citing the strong currency, high raw material costs and low prices. The local dollar traded at $1.0321 at 12:01 p.m. in Sydney.

“Many firms facing international competition are re- evaluating their medium-term prospects and business strategies, given an assessment that the high exchange rate is likely to persist and is not just a temporary development,” the RBA said in a quarterly policy statement released in Sydney last week.

Australia’s unemployment rate unexpectedly jumped to an eight-month high in July as hiring stalled, making the 41,400 net gain in jobs from January through July the worst first seven months of the year since 2003.

The central bank said slower productivity growth has been masked by the gain in the terms of trade, or export prices relative to import prices, which rose to a record last quarter.

Living Standards

“With the terms of trade expected to decline somewhat over the next few years as additional global commodity supply comes on line, a return to faster rates of productivity growth is likely to be required if living standards are to continue to rise at the average rate of the past two decades,” the RBA said in its Aug. 5 policy statement.

A block from Folino-Gallo’s office in Unanderra, Brenton Ward, a 26-year-old father of one, protests with 30 other employees outside the plant of Japan’s Shinagawa Refractories Co., which plans to cut benefits.

“We’ve had blokes that have worked here for 25 years and they’ve always got a bonus and they’ve taken that off us,” said Ward, waving a red flag emblazoned with CFMEU, Australia’s main trade union for construction, forestry, mining and energy. “We’re going to run rolling strikes until it’s resolved.” Shinagawa declined to comment on the workers’ action.

Plant Closings

Down the street, Orrcon Steel is shutting its Unanderra tube plant, affecting 47 workers. The company, owned by Hills Holdings Ltd., maker of the Hills Hoist clothesline, cited “unsustainable” losses due to the currency and aggressive import competition.

Australia has seen the cycle before. Twenty-five years ago, as exports collapsed because of weak international commodity prices, then-Treasurer Paul Keating warned the nation risked becoming a “banana republic” if it failed to change.

“If this government cannot get the adjustment, get manufacturing going again, and keep moderate wage outcomes and a sensible economic policy, then Australia is basically done for,” Keating said in an interview with radio 2UE on May 14, 1986, after the nation recorded what was then its biggest current account deficit. “We will end up being a third-rate economy.”

His comments sent the currency plummeting and prompted policy makers to tackle inefficiencies in the economy, encourage innovation and boost productivity, spawning new businesses in education, technology and tourism.

Technology

One that Keating touted and invested in was audio company Lake Technology Ltd., which listed in 1999, just before the dot- com bust, and was bought by San Francisco-based Dolby Laboratories Inc. in 2005 after the shares declined more than 90 percent from their peak.

Australia’s current Finance Minister Penny Wong says the government wants an economy “sufficiently diversified” to ensure resilience during different cycles of global economic growth.

“There’s no doubt that a high dollar does impose some challenges,” she said in an interview in Sydney. “Firms will have to ensure that their business models are such that they can be competitive in a global economy.”

For many, that isn’t happening. Australia’s services industry has contracted for three straight months; manufacturing for four of the past five; and construction for 14 consecutive months, private gauges show. Survey respondents cite the currency’s strength and the developed world’s highest interest rates as key factors.

Shifting Migration

The structural changes in Australia’s economy correspond with altering patterns of migration. For the first time in its 223-year history, Australia accepted more Chinese than British immigrants in the year to June 30, the government said this week.

Since 2005, which the central bank marks as the beginning of the current mining boom, employment in manufacturing has decreased by about 6 percent, or 59,000 jobs, according to Gary Banks, chairman of Australia’s Productivity Commission. He attributes that to a long-term shift in the economy rather than a response to the soaring local dollar.

In Unanderra, Folino-Gallo is skeptical that shift will last.

“I don’t believe in seven years China will be dependent on any one single country,” he said. “We are repeating our mistakes over and over again.”

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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