Australia’s high labour costs and volatile currency have prompted a lasting shift in exporters’ business models, writes Melodie Michel.


2013 was a tough year for Australia. An ever-rising dollar, a controversial federal election and a complete government overhaul created a degree of uncertainty that was reflected in the country’s trade balance, with deficits ranging from A$307mn to A$1.6bn over the year. But 2014 started on a better note, with the stabilisation of both the political landscape and the currency boosting business confidence.

Alan Huse, head of trade and supply chain transactions at ANZ, tells GTR: “In the period going into the election there was a little bit of uncertainty and a wait-and-see attitude from exporters. You not only had elections in Australia, but political change in China and the US as well. So we entered 2014 in a more stable environment than at the back-end of last year, and this gave businesses more confidence, largely irrespective of the outcomes – many of which were widely anticipated. Asia as a whole is doing well, the US is certainly showing signs of recovery, and Europe continues its slower, but steadier, recovery, so the whole the global outlook is not as bad as it was.”

The September 2013 federal election saw the defeat of the incumbent centre-left Labor party led by Kevin Rudd, and the victory of the centre-right Liberal-National Coalition opposition led by Tony Abbott. Peter Mace, general manager at the Australian Institute of Export, explains that the new government seems to be taking positive steps to help exporters: “The previous government was looking at a very holistic, all-or-nothing agreement, whereas the current government is prepared to maybe have a couple of carve-outs that aren’t vital, if it helps get a free-trade agreement (FTA) signed. They are a bit more pragmatic in understanding what’s possible and what’s not in getting the agreement completed. They are also still pushing hard, as the previous government was, on the trans-pacific partnership (TPP) so we’ll have to see what happens there.”

Since Abbott came into power, the Australian trade minister has signed an FTA with South Korea, and indicated a strong intention to sign similar deals with Japan and China. Trade minister Andrew Robb has also said that the government is working on a comprehensive economic co-operation agreement with India and Indonesia, to be signed after polls are held in both countries this year. Australia’s trade balance is also showing signs of recovery, with a surplus of over A$1bn for both January and February 2014.
But experts believe exporter confidence depends on many other factors, regardless of these positive signs. Gordon Sparrow, head of trade and supply chain finance at Westpac, says: “Straight out of the election there was a higher level of optimism but I don’t think it’s sustainable overall, and it’s starting to settle back already. If we’re talking about exporters in particular there are so many forces at play that I don’t think the election in itself has really driven much, other than to create a degree of caution leading up into it. Global commodity prices, the value of the Australian dollar, the slowdown in some of the key export markets that we’re going into; I think all of those things are weightier than the Australian domestic political climate.”

Currency fluctuations
While the lower Australian dollar seems to have boosted exporters’ confidence, trade finance experts warn that it will take months for the value drop to really benefit businesses. “I think that the market has to believe the Aussie dollar will trade in the high 70c to low 80c range for a sustained period, before you really start to see the devaluation having a positive effect on the mining sector. One of the key issues that affect our competitiveness in Australia is the labour cost component of our production, and that’s not that heavily affected by the currency. Yes, there was an earnings impact and that does drive a lot of margins for producers, but I don’t think the devaluation of the currency has changed our competitiveness that much,” Sparrow adds.

The International Business Survey published by the Australian Export Council at the end of March revealed that the value of the Australian dollar is still seen as the number one factor hindering international competitiveness. This is followed by transport costs and labour productivity.

Moreover, the devaluation of the dollar is a double-edged sword for businesses that started increasing foreign inputs to reduce costs while the currency was high. “Because of the strong dollar over the past two years some businesses had moved away from sourcing all their material locally and started importing inputs to keep the price down. The lower dollar now has made these imports more expensive,” Mace tells GTR.

These challenges have led some exporters to shift production to the region they export to, a trend that is expected to grow in the coming years.

“The relatively high Australian dollar, coupled with the overall cost competitiveness of manufacturing in Australia, has led many exporters to change their business models and shift manufacturing to the region, closer to their end markets. It’s quite a clever way to manage costs, currency and overall competitiveness, but that means that they’ve made a permanent adjustment to their business models and does throw up other challenges,” says Huse.

In a surprising move that reflects this trend, Australia’s export credit agency, EFIC, is now looking at a programme to provide support to Australian companies manufacturing and exporting from outside Australia. “Since EFIC has traditionally focused on supporting Australian exports, I think this is not only a very good development, but a further indication of this shift in market dynamics for the Australian export sector,” Huse adds, pointing out that local bank finance can be hard to access for small exporters setting up manufacturing plants abroad for the first time.

EFIC’s move should be a relief for small exporters, who still struggle to access the finance they need, and are concerned over the impact of the government deficit on funding programme. According to Mace, while Australian banks do have funds to lend, the criteria at the SME level is still conservative compared to other countries.

Rmb trading
Despite the agreement on direct convertibility signed by former prime minister Julia Gillard in April 2013, renminbi (Rmb) trading levels remain low. Swift’s Rmb tracker recently revealed that Australia’s Rmb payments value increased by 248% between February 2013 and February 2014, but that 98% of these payments in value are institutional, as opposed to payments sent by banks on behalf of their customers (2%). “This is most likely a reflection of the Rmb mainly being used for investments and foreign exchange activities, rather than trade settlements”, says Swift head of Oceania, Bill Doran.

The fact that most of Australia’s trade with China is in commodities – and therefore US dollar-denominated – is one factor explaining this lack of uptake. But according to bankers at ANZ and Westpac, the two banks designated as Rmb market makers upon signing of the agreement, there are other obstacles hindering growth in that area.

“There’s interest in it, and if you speak to some of the big producers in Australia, they are keen to see how far they can push it, but the problem is, unless you’re set up with a foot on both ends with, for example, a large representation in China, and you can use the Rmb as a natural hedge against the foreign currency risks, or it’s easier to transact in Rmb in terms of regulatory control, there are not a lot of other incentives to do it. There are some companies going down that path, but we’ve not seen a big rush for the moment,” notes Sparrow, adding that a lot of the activity is in the SME space where importers don’t have the leverage necessary to insist on other invoicing currencies for their imports.

Huse shares the belief that there are not many commercial incentives for either Australian or Chinese parties to start trading in Rmb, but adds that the regulatory uncertainty around Rmb transactions is another contributor. “At the start it was quite confusing in terms of regulations and the way transactions had to be structured, and I think this tended to put people off. But there is a strong desire from the Chinese authorities to promote it, and they are relaxing many of the regulations around that,” he says.

China is currently Australia’s second export destination behind the US, and according to the International Business Survey, it is the number one market exporters intend to start trading with in the future, leading many to believe Rmb trading is bound to pick up.
“There are real benefits for Australian companies to use the Rmb. Some of these benefits include faster settlement of payment between suppliers and buyers, savings on invoicing costs, reduction of exchange rate risk and reach to more Chinese customers and investors who prefer to trade in their currency,” adds Doran.

The end of Australia’s mining boom?

After almost 20 years of continued economic growth, Australia is going through a period of transition. But, according to Steven Bennett, general manager of trade, invoice and supply chain finance at National Australia Bank (NAB), calling this the end of Australia’s mining boom is “a misnomer”, as itis only the capital investment in the mining sector that has run its race.

The bank expects minerals to remain Australia’s top export sector for some time to come. “The volume of minerals exports in most cases, and the value in some, are expected to continue to increase in the years ahead,” says Bennett.

But the Australian economy is undergoing a period of rebalancing and the slowing in mining investment is a big headwind to other parts of the domestic economy, particularly considering the number of jobs it could potentially displace. Australia has often had a multi-speed economy, leading to periods of economic adjustment. Bennett believes government policies are crucial in these transition times.

“To adapt to structural change, we must have policies that ease the transition for those impacted and that will help others to emerge and prosper. The danger of the industry debate at the moment is that it is happening at a high level, when the structural changes taking place in our economy are much more complex than that – our economy is still very much multi-speed.”

NAB has observed strong growth in the services part of the economy, with increased education and tourism exports, and opportunities to broaden the export base of services to legal and accounting, health services, infrastructure construction expertise and technical agribusiness services.

But Bennett says it is unlikely agricultural exports will overtake mining exports in the future. “Can Australia’s agriculture exports become as important as iron ore? The likelihood is low. There is no doubt that food consumption in Asia will grow significantly over the next few decades. But this is a value not necessarily a volume game – we cannot expect to become the ‘food bowl of Asia’.
“There is however an extraordinary opportunity to leverage our envied reputation for safe, premium produce.”
As China begins to adapt its economy toward domestic demand and away from manufacturing-led exports, the question is: can Australia still provide what China wants?

The answer is undoubtedly yes, says Bennett. “Over the next few years, there is likely to be both a change in the price of what Australia exports but also a change in the composition of exports. As iron ore and coal decline in importance, there is likely to be a big pick-up in LNG, in no small part driven by its environmental benefits,” he says. “But it is the services part of our economy – including agribusiness – that will grow in importance.”