Falling sales and rising costs underpin subdued activity

The net balance of firms surveyed reporting higher production was -2%i, representing the third consecutive quarter of negative activity. New orders, exports, employment and profits were all weak in the quarter, although wages growth was moderate.

Ai Group Chief Executive, Heather Ridout, said the findings suggested the performance of the sector remained subdued during the June quarter 2006.

"A further fall in demand and sales was a major factor contributing to weak production in the June quarter 2006, including a growing proportion of manufacturers citing a negative impact from weak construction sector activity. The proportion of manufacturers nominating higher raw material costs as a major drag on production also doubled.

"While there is some expectation of a modest improvement in sales and production in the September quarter 2006, this will be dependent on fuel costs and interest rates remaining steady, and the forthcoming tax cuts feeding through into consumer spending," Ridout said.

PricewaterhouseCoopers Industrial Products Leader, Graeme Billings, said manufacturers were responding to the difficult conditions by lifting capital intensity and investing in new technology.

"Despite the pressure on profitability in the quarter, manufacturers continued to increase spending on new capital equipment. This is consistent with the need to become leaner and more innovative, which is essential if Australian manufacturing is to be able to compete internationally," Billings said.

Summary of key findings for the June quarter 2006:

- Four of twelve sectors reported higher production (primarily consumer-related), down from seven in the March quarter 2006. Growth was strongest in food & beverages and the largest decline was in basic metal products.
- Production grew strongly in Western Australia and fell in NSW, SA and Tasmania.
- Sales and exports both declined in the quarter. New orders increased slightly. 
Growth in supplier deliveries remained weak, while inventories increased at a slower rate.
- Profits fell for the eighth consecutive quarter. Employment and overtime also continued to decline. Growth in new capital expenditure, however, increased strongly.
- Raw material costs increased at the fastest rate since late 2004. The rate of increase in selling prices rose, though lagged the jump in costs.  Wages growth remained moderate.
- Order backlogs continued to fall sharply, although capacity utilisation increased slightly.
- Production growth is forecast to improve in the next three months, reflecting expected rises in sales and new orders. However, exports are forecast to fall further.