Suppliers to Rio Tinto face more financial pain after the global mining giant said it would double its standard payment terms to 90 days – twice as long as the average Australian business takes to pay its bills.
Suppliers to Rio Tinto face more financial pain after the global mining giant said it would double its standard payment terms to 90 days – twice as long as the average Australian business takes to pay its bills.
This change comes nine months after Rio extended its standard payment terms from 30 days to 45 days.
It also comes several months after BHP Billiton told its suppliers that its standard payment terms would increase to 60 days.
By comparison, Dun & Bradstreet’s latest trade payments analysis found that Australian businesses settled their invoices at a record pace of 44.1 days on average in the December quarter.
That's down from about 54 days in recent years.
Two-thirds settled their invoices within 30 days and only 8 per cent took longer than 60 days.
The time taken by Rio to pay its bills could be longer than 90 days, because its standard payment terms will be 90 days from the end of each calendar month.
An invoice submitted at the start of the month could sit for 30 days before being processed and accepted for payment.
BHP, by contrast, has a policy of processing all invoices on the day they are received.
Fortescue Metals Group pays its creditors 30 days after the month of receipt of invoices.
A Fortescue spokesman said the company has no plans to alter these payment terms.
Business News has spoken to several suppliers in Western Australia who are deeply concerned about the impact longer payment terms will have on their business.
“It will make life tougher for the suppliers, but also the people who supply them,” one chief executive said.
Another executive was concerned about the impact on indigenous contractors.
“The majors have made a big effort to give more work to indigenous contractors, but they operate week to week, so I’m not sure how they’ll cope.”
Contractors working in remote locations said they often spent several weeks mobilising equipment to site before commencing work.
Therefore, for a one month job, there could be a five month lag from the start of mobilisation to receipt of payment.
A Rio spokesman told Business News the longer payment terms were “designed to free up cash and reduce working capital so that we can preserve and maintain jobs and suppliers in tough global environment for commodities”.
The spokesman added that the company was working to establish a financing scheme to support suppliers.
“We are working with banks to use our strong credit rating to establish an optional supply chain financing programme to support suppliers,” he said.
“This program is being piloted with several suppliers in our aluminium business, and we intend to make it more broadly available from mid-year 2016.
“We announced at the Rio Tinto results presentation in February that we would be embarking on a further round of measures to free up cash and reduce working capital.
“Our goal is to continue to be a reliable business partner for our customers and suppliers while continuing to run a strong business for our shareholders and stakeholders. “
A BHP spokesman said its move to 60 days was designed to bring the company’s standard payment terms into line with current market and industry practice.
“We can grant exceptions to small enterprises in our local communities to operate on reduced payment terms,” the spokesman said.
The latest Dun & Bradstreet report found that all industries except utilities, and all states and territories, had recorded fast average payment times in the December quarter.
The average for the mining industry was about 48 days, while the average for WA was 42.4 days.
D&B economic advisor Stephen Koukoulas said the substantial reduction in average payment times over the past two years has probably been driven by lower interest rates.
“We have very low interest rates, and if people are sitting on cash, there is no point hoarding it,” he said.
Mr Koukoulas said the economy was doing reasonably well, which would also encourage faster payments.
“We’ve also got very low capex, so businesses don’t need to sit on cash.”