Monetary policy is hitting printers hard

High Australian dollar fails to blunt rising energy cost pressures as transportation hikes hit home.

Printing Industries national manager for policy and government affairs, Hagop Tchamkertenian, said the difficult trading conditions currently being experienced by the industry are a clear sign that the recent period of monetary policy tightening is starting to impact on industry activity. “Printing industry trading conditions tend to be greatly affected by changes in monetary policy settings. This is because the industry sells 70 per cent of its output to industries that are influenced by changes in interest rates,” he said.

Compared to the same period a year earlier material cost pressures were more intense despite the fact that the Australian currency has appreciated by 16.9 per cent over that period. “It is likely that rising transportation costs due to increased energy costs have offset the benefits of an appreciating currency,” he said.

The deteriorating business conditions have triggered a dramatic fall in industry confidence with the March 2008 quarter report of the Printing Industry Trends Survey showing business confidence at its lowest level since December quarter 2004.

According to Hagop, while some of the downturn in industry trading conditions can be attributed to season factors, the magnitude of the reported deteriorations compared to the same period a year earlier clearly suggests that other influences were at work as well. Actual outcomes for a range of key economic indicators such as orders, production, sales, selling prices, net profits, and employment were below expected outcomes.

Important March 2008 quarter developments reported by the survey respondents include:

• Reduced orders and production
• Reduced sales and net profits;
• Increased employment but reduced overtime levels;
• Increased investment in plant and machinery during the past six months;
• Finance reported harder to obtain;
• Labour availability was reported to have deteriorated for the 15th consecutive quarter;
• Increases reported across all production cost categories;
• Selling prices reported to have fallen for the 29th consecutive quarter;
• Reduced levels of raw material stocks; and
• Increased numbers of outstanding debtors.

On the critical issue of capacity utilisation rates, the March 2008 quarter results show that 60.4 per cent of respondents were operating at capacity levels of 70.0 per cent or over, down from the 71.7 per cent proportion reported last quarter and the 64.9 per cent proportion reported this time last year.

Lack of orders drags it back
The March 2008 quarter results show that 76.2 per cent of survey respondents ranked lack of orders as the primary barrier to increasing production levels, an outcome that is higher than the 74.3 per cent proportion reported during the December 2007 quarter, but lower than the 82.0 per cent proportion reported during March quarter 2007.

Hagop reported that over the outlook period industry respondents are forecasting modest net balance improvements to take place in a number of key economic indicators. Based on these forecasts the June 2008 quarter is expected to yield the following results:

• Net balance increases in orders, production, sales and net profits;
• Recovery in selling prices;
• Reduced availability of finance;
• Reduced availability of labour;
• Increased employment but reduced overtime levels;
• Further increases in all production cost categories - average wages, other labour costs, and
• Leverage material costs;
• Reduced stock levels; and
• Increased number of outstanding debtors.

Over the next six months (June and September 2008 quarters) the survey respondents expect:

• Increased investment activity in plant and machinery; and
• Reduced investment activity in buildings.

The outlook for general business expectations over the next six months remains favourable in most states. The most optimistic state is South Australia with a net balance of 36.4 per cent followed by Western Australia with a net balance of 9.1 per cent.

Respondents from Queensland reported the highest utilisation rates with 87.5 per cent of respondents operating at capacity utilisation levels of 70 per cent or more, followed by respondents from Western Australia (76.9 per cent), South Australia (72.7 per cent), Victoria (58.3 per cent), New South Wales (48.7 per cent), and Tasmania (28.6 per cent).

The March 2008 quarter report shows high capacity utilisation/activity rates were reported by the Other Packaging and Paper Converting, Cheques and Securities and General Promotional and Commercial sectors. Considerable levels of excess capacity seem to exist in the Graphic Reproduction, Screen Printing, Business Forms and Continuous Stationery and Trade Binding sectors.

The optimists and the pessimists
Most product sectors are expecting either improvements or no change to take place in general business conditions during the June and September 2008 quarters, while four sectors comprising of Other Packaging and Paper Converting, Graphic Reproduction, General Promotional and Commercial and Trade Binding are forecasting deterioration.

The sectors are either forecasting increased investment or no change in plant and machinery over the next six months, while the Other Packaging and Paper Converting sector is forecasting reduced investments.

The latest survey outcomes clearly show some interesting industry developments. The labour availability outcome was the worst in the history of the survey and highlights the difficulties that increasing number of companies operating in the printing and associated industries are having in keeping and attracting labour. Finance was reported harder to obtain the first such outcome since June quarter 2004 and the worst net balance reported outcome since March quarter 1992.

Selling prices continue to fall as well yet the industry continues to remain optimistic that prices will start to recover. The March quarter outcome for material costs is pointing to a deteriorating net balance trend.

Compared to the same period a year earlier material cost pressures were more intense despite the fact that the Australian currency has appreciated by 16.9 per cent over that period. It is likely that rising transportation costs due to increased energy costs have offset the benefits of an appreciating currency.

Raw material stocks were also reported to have declined for the fourth consecutive quarter and average wage outcomes continued to remain significant during the March 2008 quarter.

Hagop expressed hope that the latest monetary policy statement by the Reserve Bank in which it indicated that recent increases in interest rates have started to impact on economic activity and are expected to exert a downward pressure on inflation is a sign that interest rates may have peaked. ‘’Hopefully the Reserve Bank is right and the next move in official interest rates may be a downward one” he said.

Any one interested in obtaining a copy of the full survey report can contact Printing Industries¬. Hard copies of the report cost $20 for Printing Industries members and $40 for non-members. Electronic copies of the report are also available on request and cost $20 for members and $40 for non-members. Annual subscription to Printing Industry Trends Report is $60 for members and $120 for non-members.