Navigating through tough times – magazine feature

The 2004-2005 financial year proved to be difficult for many operators in the printing industry. Both official data released by the Australian Bureau of Statistics (ABS) and Printing Industries own research, undertaken as part of the quarterly Printing Industry Trends reports, clearly shows an industry experiencing challenging economic times.

During the past 4 quarters, covering the period September 2004 to June 2005, the printing industry has experienced declining economic activity. While no growth was registered during the 2004-2005 financial year in the printing industry, the Australian economy continued to expand.

The Australian economy grew by 2.3 per cent on trend basis during the 2004-2005 financial year while the printing industry contracted by 6.3 per cent over the same period.

Compared to general economic activity, the printing industry's economic growth pattern has also proven to be much more volatile. While the printing industry's economic activity still seems to be correlated to that of the Australian economy, the correlation seems to have weakened in recent times.

Signs of a mature industry

Taken over a longer timeframe, the printing industry is showing signs of maturation with output growing at a rate below the national rate of economic growth. The printing industry's rate of economic growth lags behind other leading sectors such as construction, retail trade and health and community services.

Over the five years to June 2005, the printing industry grew by 6.2 per cent, compared to a growth rate of 16.5 per cent for the Australian economy.

Volatile and depressed sales

The movement in printing industry sales has historically proven to be very volatile. During the 2004-2005 financial year however sales proved to be less volatile by remaining largely depressed. The last time sales were reported to have improved was June quarter 2004.

Margins tighten, selling price drops

With the price of materials used in the printing industry rising and the price of articles produced (output) falling in the second half of the financial year, industry margins are once more falling with an increasing number of printing businesses experiencing declining profits.

The other source of evidence about falling industry margins, comes from selling price data captured by the Printing Industry Trends reports. Selling prices were reported to have deteriorated during the 2004-2005 financial year with the June 2005 quarter representing the 18th consecutive quarter reported decline. What is also interesting is that positive price expectations have now given way to negative price expectations.

Capital expenditure intentions remain strong

Despite difficult trading conditions, capital expenditure intentions continue to remain robust. The last time expectations were negative was during March quarter 2001, since that time expectations have consistently been positive with varying degrees of confidence.

ABS capital expenditure data also shows a similar pattern with printing industry expectations continuing to hold firm. Based on the ABS data, printing industry capital expenditure intentions over the next 12 months to June 2006 amount to almost $770 million. Even if actual outcomes come in below expected outcomes and factoring an error rate of 25 per cent, there is still likely to be an additional $575 million of new investments taking place in the printing industry over the next 12 months.

Capacity utilisation rates deteriorate

The capacity utilisation index that is used to track movements in the overall industry, deteriorated in the second half of the financial year. The proportion of companies reporting to be operating at capacity levels of 70 per cent or above was at the lowest level during June 2005 quarter for almost 3 years.

Optimism remains high

As a collective entity, the printing industry continues to largely remain optimistic about future business prospects with business confidence remaining positive despite a series of recent poor trading quarters. While there was a significant drop in industry confidence during the December 2004 quarter, the final 2 quarters of the financial year saw a strong surge in business confidence. The last time business expectations were negative was during the March 2001 quarter.

Shortage of skilled labour

With the unemployment rate in Australia falling to a generation low of 5 per cent, the printing industry is experiencing difficulties in obtaining skilled labour.

According to the Printing Industry Trends report, labour availability was reported to have deteriorated during the 2004-2005 financial year. The last time there was a positive net balance in labour availability was back in September quarter 2003. Since that time the proportion of companies reporting deterioration in labour availability has consistently surpassed the proportion of companies reporting improvements resulting in negative net balances.

The 2004-2005 financial year outcome represents the worst labour availability since the 1999-2000 financial year.

Conclusions - a mixed bag
The printing industry finds itself in the midst of an economic downturn. During the past 15 quarters, the printing industry has experienced 10 quarters of declining economic activity. Taken over a longer time frame, industry growth while still being positive is well below general economic growth. This pattern displayed by the printing industry is consistent with growth patterns found in mature industries.

Industry sales, while extremely volatile, have become depressed in recent times and falling selling prices and rising costs have combined to slash industry margins further to levels that may ultimately prove to be unsustainable for many operators.

Poor trading conditions in conjunction with continuing investments in new technology have resulted in significant deteriorations being reported in industry capacity utilisation rates. Some sectors of the industry have responded to increased capacity rates by engaging in price competition. Despite the idle capacity problem, the printing industry remains committed to additional investments over the next 12 months. Both ABS and Printing Industries research data show strong capital expenditure intentions.

The industry's struggle to attract qualified and skilled labour coupled with generation-low unemployment rates is resulting in more and more companies reporting difficulties in obtaining skilled labour. While some operators can respond by investing in labour displacement technology others no doubt will be faced with the prospects of rising labour costs.

Hagop Tchamkertenian is Manager of Industry and Commercial Policy, Printing Industries. he can be reached via telephone on (02) 8789 7300, or via email at hagop@printnet.com.au.