Friday, February 10, 2012

How the high dollar hurts

Colebatch:

For 20 years from 1985 to 2005, the Aussie dollar averaged US70c. Now it is hovering around $US1.05. At that level, the question is: does it make sense for any firm to export manufactured goods from Australia?

It's not just Alcoa, Toyota or Holden. It's any firm that exports from Australia, or competes with imports. In the currency of global trade, producing in Australia is now 50 per cent more expensive than in the past. That applies to cars, computer games, university courses or tourism.

Between 1985 and 2005, the Aussie floated between US50c and US90c. If it got too high, firms would tighten their belts, grit their teeth and wait for it to fall. This time it's different.

The dollar is now far above its old levels. Some say it could go higher. Many, most, believe it is now up there to stay. This is not just a cyclical high, it's a structural shift. And it has wrecked good business plans that had assumed a dollar in the range it used to live in.

The destruction is going on all around us. Since the global financial crisis began, Bureau of Statistics figures show, a net 127,000 manufacturing jobs have been wiped out across Australia. One in every eight manufacturing jobs has gone already. Far more than that are under threat.

Treasury, the markets and the Reserve Bank tell us the Aussie is set to remain high far into the future, maybe for decades. It may not stay at today's level, but it will stay well above the zone it lived in before the minerals boom began. This is an epochal change, which will change Australia.

Why does the level of the dollar matter? Suppose you're a manufacturer in Clayton making plastic thingos. There's a big global market, but you're competing with manufacturers in China, Korea, everywhere.

Suppose it costs you $A10 to produce a kilo of thingos... With the dollar at US70c, that makes your costs $US7 a kilo. Suppose the world price is $US9 a kilo, then you're making a decent profit from exporting.

But with the dollar at $US1.05, suddenly your costs have jumped to $10.50 a kilo, yet the global price is only $9. To export thingos now costs you money, serious money. If you think the dollar is going to stay that high, you either somehow cut costs dramatically, or give up the game.

And that's not all. Suppose your Chinese rival can produce thingos for $US5 a kilo. When the $A was US70c, his costs in $A were marginally higher than yours; you could hold him off at home. But with the Aussie at $US1.05, his costs are now less than $A5 a kilo. He can undercut you and take away your local contracts. If you think the $A will stay up here, you don't just give up exporting - you give up manufacturing.

This is a crisis that will bring many well-run firms to their knees: not because they are inefficient, but because costs beyond their control have made them uncompetitive. It is a crisis that, if the dollar remains high as forecast, will cost hundreds of thousands of manufacturing jobs.

But seeing our politicians arguing is like watching two bald men fighting over a comb.

Julia Gillard and Wayne Swan always trot out the line that Labor understands that there are people and firms who are doing it tough. OK, but what are you are going to do about it?

Tony Abbott says he wouldn't have a carbon tax. Wow. A carbon tax might add about 1 per cent to the cost of manufacturing in Australia. The higher dollar has added about 50 per cent. What are you going to do about that?

One option is to do what others do: get the central bank to drive the dollar down. That's possible. They can do that by printing money - but that's the recipe for inflation.

There's two other ways, both unpalatable: invest overseas, as China does, or stop wage growth, as Germany once did.

Our best chance was the mining tax. A 40 per cent tax on superprofits in all mineral sectors, as originally intended, would have sharply slowed mining industry growth, reducing the upwards force on the $A and allowing other industries more room to grow. But Tony Abbott said no, Labor backed off, and even its emasculated tax is yet to pass Parliament.

In the crisis, our politicians and policy advisers have failed the test - unless you think ''do nothing'' is the correct answer. This change will leave many victims in its wake.


Ridout:

Manufacturing industry leader Heather Ridout is in no doubt the high dollar is stifling her members’ businesses, but she says it isn’t just making Australia unattractive compared with Asia.

“We are losing competitiveness against the United States,” she says. “I was talking to a company today that has found a 30 per cent differential in wage costs between the US and Australia. That’s at the prevailing exchange rate. It would make sense to move their operations to the United States.”

Whereas during the global financial crisis Australian manufacturers didn’t think about moving offshore, believing the crisis would pass, she says now they believe the high dollar is here to stay.

“They held on to their workforce during the GFC. They did deals to reduce hours, people took all their holidays, people went on training courses, you name it, gardening leave,” she says. “But now there is a certainty things won’t return to how they were. The reality is dawning, and the implications aren’t great for Australia.”

Ms Ridout nominates the apparently permanently elevated dollar as the biggest threat to manufacturing in living memory, certainly bigger than the reduction in tariffs - which happened gradually - and bigger than the rise of China as a competitor.

Australian Workers’ Union boss Paul Howes yesterday blamed the Reserve Bank for the high dollar saying the Bank signed a ‘‘death warrant’’ for manufacturing on Tuesday when it left its cash rate on hold. The dollar jumped more than 1 US cent to 108 US cents within minutes.

“The Alcoa aluminium plant in Geelong can be incredibly profitable if the dollar sits at 104 or lower,’’ Mr Howes said. ‘‘But when you’re sitting near 110 and when there are no signs of it coming down, when the Reserve Bank is basically trying to sign a death warrant on Australian manufacturing industry; yes, these jobs are under threat.’’

Ms Ridout who joins the board of the Reserve Bank on Valentines Day said it wasn’t fair to blame the Bank for the high dollar, when so much else was propping it up.

“United States official interest rates are set at zero for the next couple of years, European authorities are lending at 1 per cent. Our rates are higher but the Reserve’s decisions won’t much change that. Our triple-A credit rating is pulling in money and high commodity prices are boosting demand for dollars.”

“Our members are fighting back - some are boosting research and development - but I can’t guild the lily. Things will not be the same.”


Related Posts

. If I hear one more person tell me to bring down the dollar - straight talk from Parkinson

. Mining hurts us more than we think

. The Aussie ain't that high, long term


6 comments:

The Lorax said...

Why does Colebatch post so rarely?

mOOm said...

The government should be running a surplus then the RBA could slash interest rates to world levels and the dollar would come down....

Peter Martin said...

Tim Colebatch has been on leave for the best part of six months writing a book.

He's back!

The Lorax said...

I look forward to more Colebatch then!

Taylor said...

The best book I have read on Australian manufacturing is Dr Peter Brain's "Beyond Meltdown". It was written just after the Asian crisis, but is more relevant than ever.

In fact I think it's one of the best short treatises on economics generally.

The requirements for a viable manufacturing sector go far beyond simply managing the exchange rate environment, as Australia's Asian neighbours well know.

Anonymous said...

This was a very interesting article. Despite reading some quite well argued pieces by economists as to why we shouldn't worry about losing manufacturing, I still can't shake the feeling that we would be losing something important, and not just in an economic sense. The most notable of these was by John Kay. The same could be said about losing an agricultural sector. There seems to be a lack of appreciation amongst economists of the limits of their discipline to explain the wider workings of society beyond the crude indicators. People like to make stuff and they like to know how things are made, and making things in Australia might give people a vicarious connection to the process.

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