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Unions Flexing Muscles in Australia Seen Squeezing Builders

Labor disputes are on the rise at Australian construction companies such as Grocon Pty and Lend Lease Group’s Abigroup, putting added financial strain on an industry already struggling with cuts in bank lending.

A standoff over union representation cost Melbourne-based Grocon as much as A$7 million ($7.3 million) and 16 days of interrupted work, according to Australia’s biggest closely held builder. Workers at a Brisbane building project run by a unit of Lend Lease, the nation’s biggest developer, have been on strike since Aug. 6.

The Labor government replaced the building industry watchdog in June with a body with less power to force employees back to work and smaller penalties for union breaches. Working days lost across Australia due to industrial activity almost tripled to 101,700 in the quarter ended June 30 from the previous three months, the highest since the statistics bureau began releasing the data in March 2008. Days lost in the construction industry rose to 9,000 from 6,000.

“For the current quarter, these numbers will be even higher,” said Stephen Walters, JPMorgan Chase & Co.’s chief economist in Australia. “It’ll undermine investor confidence. If you’re going to invest many hundreds of millions of dollars, you want more certainty about projects.”

Australian banks have cut outstanding lending to commercial property by 15 percent since its 2009 peak, the Reserve Bank of Australia said in its March Financial Stability Review. Driving the decline is an increase in non-performing loans, the exit of some foreign-owned lenders and a lack of appetite by local banks to take on more risk, the RBA said in a statement in May.

Soured Loans

Impaired commercial property loans account for A$9 billion, or 45 percent of all non-performing business loans.

The value of building work done fell a seasonally adjusted 5.2 percent to A$18.5 billion in the quarter ended June 30 from a year earlier, according to the statistics bureau.

Listed developers including Stockland and Devine Ltd., and building-materials companies Boral Ltd. and CSR Ltd. cited weakness in the construction and property industries for subdued results in the latest reporting season.

Devine reported a loss in the latest earnings period, while CSR’s and Boral’s building products divisions saw income decrease. Stockland forecast a drop in fiscal 2013 earnings.

Earnings Weakness

Sydney-based CSR’s share price has plunged 27 percent this year, while Devine, headquartered in Springwood, Queensland, has seen its shares slump 13 percent this year. Boral, based in Sydney, has dropped 2.5 percent, while Stockland, which also owns and manages retail and office properties and retirement villages, has risen 4.1 percent. That compares with a 7 percent gain in the benchmark S&P/ASX 200 index.

The rise in labor disputes “has broader ramifications for the construction industry around Australia, representing a major industrial and legal risk for investors, and tender prices will go up to cover the risk,” said Wilhelm Harnisch, chief executive officer of the Canberra-based Master Builders Association, which represents about 33,000 companies across Australia.

If disruptions escalate or spread or result in significant union wins, “we may revisit our appetite,” said John White, who helps oversee $3 billion as Melbourne-based managing director for Asia-Pacific public real estate securities at investment firm Heitman.

The industry contributes A$102 billion to Australia’s gross domestic product, accounting for almost 8 percent of the economy.

Legislation Change

The Labor government’s Fair Work Building and Construction commission on June 1 replaced the Australian Building and Construction Commission, which, established by the then coalition government in 2005, axed some worker safeguards and made it easier for employers to fire people.

Following the Labor party’s election win in 2007, then-Employment Minister -- and current Prime Minister -- Julia Gillard overturned that legislation, giving unions more power to negotiate wage deals and widening the issues they could seek to address.

“To point the blame at the Fair Work Building and Construction is simply reckless,” said Bill Shorten, the federal minister for employment and workplace relations, in an e-mailed response to questions.

‘Militant’ Employers

“It is lazy and scurrilous to suggest that a small number of disputes in such a large industry are related to the abolition of the ABCC,” Dave Oliver, secretary of the Australian Council of Trade Unions, the representative body for unions, said in an e-mailed response to questions. “The real cause has been a decision by employers to take a more militant approach.”

The construction industry is Australia’s third-biggest employer, after health care and social assistance and the retail industry. It employed 993,200 people as of May 30, a 5.5 percent drop from a year earlier.

Construction wages excluding bonuses rose 4.1 percent in the year ended June 30 and climbed 11 percent since the 2009 fiscal year, according to statistics bureau data.

The Grocon dispute began on Aug. 21 when about 1,000 representatives of the Construction, Forestry, Mining and Energy Union gathered at the A$1.2 billion Myer Emporium building site in Melbourne. They were seeking the right to display union logos and posters and have union safety representatives on building projects.

It spread to three other sites around the city, despite court rulings that they were unlawful. The union ended the action on Sept. 6 and the two sides are now in talks, with the union laying out its concerns this week, Grocon Chief Executive Officer Daniel Grollo told reporters in Melbourne on Sept. 7.

Seeking Costs

Grocon is seeking to recoup the costs incurred through court action, said Grollo, grandson of Luigi Grollo, who founded the company more than 50 years ago.

At Abigroup’s A$1.4 billion Queensland Children’s Hospital project, about 600 workers have been on strike since Aug. 6 over issues including the use of non-union agreements and seeking the same rates of pay for all workers employed by subcontractors performing similar jobs.

The dispute began when one of the subcontractors, which had underbid its rivals to get the job, failed, according to the Brisbane Times newspaper. Fair Work Australia, the national workforce tribunal, and the federal Magistrates Court have ordered strikers to return to work and refrain from union action, Abigroup’s Sydney-based spokesman Joel Annett said.

Conflict Costs

The conflict has cost the company more than A$6 million, the Australian Financial Review reported on Sept. 7, citing Abigroup. Annett declined to confirm the cost.

FWBC has been investigating the Grocon and Queensland Children’s Hospital disputes and continues to prosecute and obtain penalties against those who break industrial law in Australia’s building and construction sector, Shorten said.

CFMEU spokeswoman Jeana Vithoulkas didn’t respond to a request for comment. Peter Tighe and Allen Hicks, spokesmen for the Communications, Electrical, Plumbing Union, which is involved in the dispute at the Abigroup site in Brisbane, declined to comment.

The union disputes “are something that’s not needed at this point, where we are in the economic cycle, and where we are in terms of getting the property industry, development industry, moving along,” said Winston Sammut, Sydney-based managing director of Maxim Asset Management. “We don’t need the uncertainty hanging over us at this point.”

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