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Mon, Oct 24, 2016 08:18
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Innovation or Desperation

In my very first article for PaperMoney, I reported on an announcement, which at the time was hailed as a bold partnership between government and business to grow the paper industry in Australia.

My report read, in part, “At the 64th Annual Appita Conference the Federal Minister for Innovation, Industry, Science and Research, Senator Kim Carr released the outcome of a strategic review of the Australian pulp & paper industry. Despite modest growth of the industry over the past decade, the report concludes that the industry is at a tipping point and significant positive actions will be needed to prevent the industry from slipping into an abyss. These actions include the need for appropriate policy settings in areas such as plantation investment, renewable energy, trade, skill development, infrastructure and investment facilitation. These will build on natural advantages and assets that Australia has, to provide a platform for a sustainable pulp and paper industry into the future, including vast plantation wood resources, generally competitive energy costs and skilled labor.”

An outcome of the report was to establish an Innovation Council to address issues raised in the Strategic Report. That Council operated for twelve months and set the groundwork for an advisory committee that will support the work of yet another committee, the Manufacturing Leaders Group!

There is an implied sense of urgency in that the Advisory Group will terminate at the end of this year.

As I have reported all too often, in the following three years that tipping point seems to have very much tilted in the direction of the abyss. However, there has not been a lot of reported activity from the Council on Innovation. Late last year, with considerably less fanfare than greeted the first announcement, the Australian Federal Government released its response to that strategic report. It has to be said that the government has had a lot of other things to deal with in the interim, particularly its plummeting popularity and a growing budget deficit. Senator Carr has been relieved of all ministerial responsibility and industry members on the Innovation Council have been preoccupied with day-to-day survival.

The original strategy report identified a number of challenges faced by the pulp and paper industry (but also most manufacturing industries in Australia). These included:

• Relative age and small size of plant and equipment and a lack of significant investment;

• Increased international competition – intensified by the value of the Australian dollar;

• A low level of research and development affecting the industry’s level of innovation and international competitiveness;

• Increasing electricity costs;

• Need for continued access to timber resources;

• Low public awareness of environmental practices of the industry;

• Lack of fair trading conditions in international markets; and

• Lack of availability of efficient public infrastructure.

The report identified innovation, investment, sustainability and productivity as four key areas for action.

The Australian Federal Government’s formal response to the Pulp and Paper Industry Strategy Group Report has trotted out its standard list of achievements and all the wonderful things that it has done and is doing for industry. However, the response sidesteps the structural issues of a strong currency and trade policy that seem to favor importers. It has to be questioned if the Council has actually been able to deliver its primary purpose, which was to “provide strategic advice on priorities for innovation, and in particular, opportunities in water and energy efficiency, fiber production and product development including considering development of a bio-products manufacturing industry in Australia.”

Some of the positive outcomes identified are dubious, such as the introduction of a carbon price. It is true that the pulp and paper industry is significantly protected from this impost due to its status as a trade exposed industry, but there is a general impact on supply chain costs including freight and raw materials. Australia’s Clean Energy Act introduced a fixed price of $23 for permits in July 2012, which is set to rise 5% a year through 2015 and then shift to cap and trade linked to the EU market. A market price of $29 was assumed by 2015. However, the cost of permits on London’s ICE Futures Europe Exchange fell to an abysmal 2.75 Euros ($3.50) a metric ton last month so the comparative impact of this tax is yet another major detriment to industry in Australia.

Despite a number of ongoing reviews to improve Australia’s anti-dumping regime, little seems to have changed and the recommendation from the latest review to establish yet another government department seems unlikely to get much support in the current era of financial austerity.

Reading past the spin to the specific government responses at least some areas of tangible assistance should be acknowledged. It notes a $9.5 million grant towards a $90 million deink plant at Australian Paper’s Maryvale Mill. A grant of $28 million has also been provided to Norske Skog in support of an $84 million project at their Boyer mill to produce lightweight coated papers.

The underlying challenge is the unsustainable competitive position in Australia that is both of our own making but paradoxically out of our control. Australia’s economy is driven by mining with the price of mining products usually denominated in US Dollars or adjusted to a global price. But a sustainable cash flow boosted by increasing sales volumes underpins a strong currency. Interest rates in Australia are high by global standards, but a series of significant reductions have had minimal impact on our exchange rate. This is attributed to the “quantitative easing” monetary policies that are being applied in many countries along with a priority to print money, both of which have the impact of underpinning the strength of the Australian Dollar. The general consensus is this strength is not going to abate anytime soon.

Since we hardly manufacture anything much in Australia these days, a strong currency should mean all those imported goods that we consume so enthusiastically should be really cheap. Wrong! A recent study demonstrated graphically that the underlying cost structure in Australia is in need of radical urgent attention.

Despite a very strong currency the cost of just about everything makes Australia nearly the most expensive country in the world across a spectrum of goods and services.  A recent Deutsche Bank report confirmed what many suspected – whether catching public transport, ordering a beer or buying medicines, Australians pay among the highest prices on the planet.

Overall costs in Australia were 59% higher than in the USA. As examples, on average, gas is 71% more expensive, beer 37%, iPhone 26%. Even a Big Mac will cost 12% more. The one bright spot I could find is that a haircut in Australia is cheaper than in the USA and it is a whisker cheaper to rent a car. Much of this disparity relates to a high underlying wage structure – Australian wages have outstripped inflation for more than a decade – but some of it (such as an iPhone) is because they can! Of course, higher wages and the fact that a higher proportion of our citizens actually have a job means that Australians can also afford to pay more.

So if you don’t drink (and that includes Coca Cola and bottled water), eat, go to the movies, buy a car or clothes, it is OK.

The good news for individuals is that it is really cheap to travel abroad, but that is having a negative effect on local tourism. This perpetuates a cycle to drive up costs locally.

So to get back to the paper industry, all of these issues are a reminder of the challenges that face the industry in Australia, particularly how it can compete against lower-cost countries. Significant productivity improvements are the answer, but for the most part that will require significant capital reinvestment.

Ultimately, we will have to learn to live with a strong currency, but the government does need to ensure a level playing field and take away the costs that are associated with social responsibility agendas (such as the carbon tax) to encourage industry to reinvest. When we finally exhaust our reserves of iron ore, we will not have to worry about a strong currency but it will be too late to profit from it if we have not reinvested to lock in sustainable manufacturing.

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