August 22, 2011 / 6:38 AM / in 6 years

Soaring Australian dollar claims manufacturing victims

MELBOURNE (Reuters) - Australia’s strong currency struck a heavy blow to the nation’s manufacturing industry on Monday when BlueScope Steel (BSL.AX), its largest steelmaker, unveiled plans to shut half of its steel-making capacity, cease exports and slash 1,000 jobs.

The soaring Australian dollar has inflicted an increasing toll on manufacturers, hitting earnings at a time when raw-material costs are also surging, in a trend already familiar to other nations with strong currencies such as Japan.

The Australian dollar has surged 70 percent since touching a low of around 60 U.S. cents during the global financial crisis in late 2008 to push past the greenback. It now fetches $1.04, having climbed as high as $1.10 last month, a 29-year peak.

“There is no doubt that if the Aussie dollar fell, we would be a much more viable and profitable business and we would look at exports again,” BlueScope’s managing director, Paul O‘Malley, said after reporting an annual loss of $1.1 billion.

BlueScope shares, already the third-worst Australian performer this year, sank 11 percent to a record low of A$0.70 after the announcement. The company also said it would close a blast furnace at Port Kembla, south of Sydney, and would lose half its production capacity to 2.6 million tonnes a year.

Businesses and policymakers are accustomed to an average exchange rate of around 70 U.S. cents, but they and many economists are convinced the recent strength is here to stay, a long-term trend that reflects an historic boom in the nation’s mining exports.

The mining boom, which is feeding an insatiable hunger for resources from China, is so strong that it can withstand the high currency, but export manufacturers are being forced to slash costs, move production offshore or stop exporting altogether.

Australia’s Prime Minister Julia Gillard acknowledged on Monday that local steelmakers were in trouble in what she called a “patchwork economy.”

“As the resources sectors grows, when it’s hungry for people for skills, for infrastructure, when we’re enjoying record terms of trade, when the Australian dollar is so strong, that does put pressure on other industry sectors,” Gillard told reporters.

“We should not conclude from that, that we won’t be a country in the future that manufactures things. We will be a country that manufactures goods,” she said.

Gillard was eager to demonstrate government support for manufacturing jobs, bringing out two other senior ministers for a media conference and offering accelerated assistance worth up to A$100 million ($104.45 million) for BlueScope.

“We’ve got to keep working to ensure that we maintain competitiveness, we’ve always got to be looking to take ourselves up the innovation and value chain.”

DUTCH DISEASE?

BlueScope echoed the concerns of economists who believe Australia is in danger of catching “Dutch Disease,” named for the experience of the Netherlands when its non-resources export sector withered after its gas industry took off in the 1960s and sent the guilder soaring.

“The challenge is going to be that if we do get back there (60-70 U.S. cents), what will happen to the Chinese steel industry,” BlueScope’s O‘Malley said, questioning whether Australian steel exporters would ever be able to bounce back.

“Will it (China) become an exporting juggernaut, or will it actually rationalize as it happened in the U.S. and Europe historically?”

BlueScope and its major domestic rival, Onesteel OST.AX, were spun out of mining and metals giant BHP Billiton (BHP.AX) (BLT.L) between 2000 and 2002 after the Anglo-Australian group BHP struggled to make money in steel.

“These companies were spun out of BHP at a time when Chinese steelmaking capacity was half of what it is today,” said Prasad Patkar, a portfolio manager at Platypus Asset Management.

When BlueScope and Onesteel were spun off, China was producing about 300 million tonnes of steel a year. It now makes 700 million tonnes and is heading toward 1 billion tonnes.

“It’s going to swamp that 7 million tonnes of production (capacity) in Australia, you’d think,” Patkar said.

    Some 7,000 job cuts have been announced in Australia since June, mostly in manufacturing, according to Merrill Lynch.

    Australia’s top airline, Qantas Airways (QAN.AX), joined the list last week by announcing 1,000 job cuts, brought about by competition on international routes and a strong Aussie dollar that is hurting tourism, the nation’s fifth-largest export earner.

    The currency has been a major talking point during this month’s local earnings season, with global packaging group Amcor (AMC.AX) revealing on Monday that the Australian dollar had chopped A$80 million from its annual earnings.

    CSL (CSL.AX), the world’s second-largest blood products maker, recently reported a A$116 million blow to earnings from currency swings.

    The strong currency has helped retailers who import goods, but they have suffered as shoppers have turned frugal and used their strong Australian dollars to shop online from offshore sites.

    BlueScope and Onesteel, which has already announced 400 job losses with more possibly to come, have also been hit by high iron ore and coal costs as well as low steel prices.

    BlueScope said it would refocus on the domestic market and consider moving production offshore.

    “The restructure will better position us for profit and growth in Australia and allow us to grow our presence in building construction markets....We will also focus on growth opportunities, particularly in Asia,” said O‘Malley.

    BlueScope reported a net loss of A$1.05 billion ($1.1 billion), including writedowns, for the year ended June. The loss does not include any restructuring charges from Monday’s announcements, to be taken in the current fiscal year.

    ($1 = 0.957 Australian dollars)

    Additional reporting by Michael Smith; Editing by Mark Bendeich and Matt Driskill

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