31/08/2011 - 11:17

Our two-speed reporting season

31/08/2011 - 11:17

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The profit-reporting season has shone a light on Australia’s two-speed economy.

WESFARMERS managing director Richard Goyder summed it up when he said the diversified conglomerate was not a bad reflection of the national economy.

Wesfarmers’ operations cover everything from retailing to coal mining to a wide range of industrial services.

Some areas, like discretionary retail spending, were very weak, and resulted in its Target business suffering a fall in earnings.

Others, such as its Coles supermarket business, also faced challenging business conditions with little growth and intense price competition.

Then there was Wesfarmers’ coal mining business, which reported a bumper profit as it benefited from strong commodity prices.

Some of Wesfarmers’ industrial supplies businesses also reported good earnings results, helped by their exposure to the resources sector.

The overall result was a strong rise in group profit, helped to a large degree by strategic initiatives in its retail businesses, where it is winning market share.

There is a parallel there with the national debate over productivity. Australia cannot rely on growth to deliver rising prosperity; we need to work harder and smarter if we want to sustain the strong growth that has characterised the national economy for most of the past 30 years.

Coles arch rival Woolworths is at risk of suffering the same issue as the national economy. After delivering strong earnings growth for successive years and being the clear market leader, it is struggling to maintain that momentum.

Retail spending is weak and Woolworths is battling to find the efficiency gains that Wesfarmers’ retail businesses have delivered.

The battle between the two retail behemoths, which will soon extend to the hardware industry, is being played out in a smaller way by many other retailers.

The smart operators manage to deliver stronger earnings, while all around, retail businesses flounder and in many cases slide into failure.

Manufacturing is another sector under pressure, as it suffers from the high Australian dollar, weak demand in the domestic economy, and poor productivity growth.

There are no easy answers to the problems besetting manufacturing, evidenced most clearly by the mass job losses at BlueScope Steel.

The growth momentum in the resources industry means that more people and more money will be drawn to the growth sectors.

Just look at iron ore. It was the driving force behind record profits at global mining giants BHP Billiton and Rio Tinto, and local companies Fortescue Metals Group and Atlas Iron.

Those profits will fuel the investment surge in the iron ore sector, as detailed in this week’s cover feature.

Some $40 billion is being invested in iron ore projects currently under way in the state; and a whole lot more is set to follow.

While iron and coal have been the star performers, commodities such as gold and gas have also been strong, buoying investment in those sectors.

Importantly, most of the $40 billion being invested in iron ore projects will be spent in Australia – typically between 85 and 90 per cent.

In contrast, there is a much larger leakage from the liquefied natural gas (LNG) sector, which has been the second driving force behind WA’s resources boom.

About half the spending on LNG projects goes to international suppliers, and this proportion could get even larger as the industry continues its rapid expansion.

Nonetheless, many engineering and contracting firms are continuing to benefit enormously from the surge in resources projects.

Engineering and construction contractor Monadelphous is a prime example, having just reported its 10th successive increase in annual profit, while drilling contractor Ausdrill has reported its seventh successive profit increase.

Other contractors, such as NRW and MACA, have also reported bumper profits.

The latest round of profit reports also shows that operating in a fast-growing industry sector is no guarantee of success.

Shareholders in companies such as Leighton Holdings, Downer EDI, Macmahon, UGL and Southern Cross Electrical Engineering will all be feeling frustrated by the problems their companies have incurred during the past year, usually on just one or two big projects that failed to deliver the expected profits.

That provides another lesson for Australia. Even if the global economy recovers, there is no guarantee of success on the home front.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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