Potential Growth in the Australian Manufacturing Sector

In the mid-1960’s, Australian manufacturing employed around 25% of the working population; that in 2021, was down to around 6.4%.

But is this about to rebound, courtesy of the supply line problems as painfully exposed during the Covid pandemic, and the steadily warming geopolitical problems with our largest trading partner and the main culprit for our waning manufacturing sector?

Put simply, is manufacturing returning to Australia?

 YES, said 55% of 500 manufacturing managers as surveyed by PROS an AI based pricing firm in mid-2021, – and they expect to complete this by 2023, with some 22% of them stating they had already begun the ‘onshoring’ process.

 Frankly, I would think this may well have included some hubris at a time of experiencing the painful grinding of the Covid offshore supply chain in 2021 and the reality of life is that the alure of a cheap price has replaced past unpleasant memories, so for many, it has been a return to offshoring, but with excess inventory as a buffer, just in case.

 That said, the Buy Australia campaign has reported increased interest, though I seriously doubt the Roy Morgan data from 2019 which suggested that more than three-quarters of consumers prefer to support Australian-made products.

 Support, YES, but put their hand into their pockets, maybe not so. Why? Low price is a powerful financial aphrodisiac.

 The Government too, have been posturing for greater self-sufficiency in key areas, most notably tied to renewable energy and defence matters. This, no doubt, has been fuelled by the geopolitical issues right at our doorstep, with China and the disputed Asian trading sea lanes.

 When combined, the prevailing mood of this debate is that we need to change Australia from being a dig-and-ship economy, where we enjoy a first-world lifestyle with a broken third-world industrial structure into a smart economy which can compete on value and not low price. Specifically, adding value to the resources we dig up, and to blend past history with the current situation, we need to convert ‘steel into bullets’ rather than expert the steel and have it returned to us as bullets by the Japanese in WW2.

 The ALP government have commenced the National Reconstruction Fund and have made available some $15bn to partner with private interests.

 Specifically in these key areas and this is where there may be some investment potential with specific listed manufacturers (taken directly for the ALP website):

·        Value add in resources: Expand our mining science technology, ensure a greater share of the raw materials we extract are processed here, for example, high purity alumina from red mud in bauxite processing or lithium processing for batteries.

• Value add in the agriculture, forestry and fisheries sectors: Ensure we unlock potential and value add to our raw materials in sectors like food processing, and textiles, clothing and footwear manufacturing.
• Transport: Develop our capabilities in transport manufacturing and supply chains including for cars, trains and shipbuilding.
• Medical science: Fulfil our potential, given our world leading research, in providing essential supplies such as medical devices, and Personal Protective Equipment (PPE), medicines and vaccines.
• Renewables and low emission technologies: Pursue commercial opportunities including from; components for wind turbines; production of batteries and solar panels; new livestock feed to reducing methane emissions; modernising steel and aluminium; hydrogen electrolysers, and innovative packaging solutions for waste reduction.
• Defence capability: Maximise our requirements being sourced from Australian suppliers employing Australian workers, whether they be technology, infrastructure or skills, complimenting Labor’s Defence Industry Development Strategy.
• Enabling capabilities: Support key enabling capabilities across engineering, data science, software development including FinTech, EdTech, AI and robotics.

When out get among the weeds, there are some contradictions. For example, the push for renewables contradicts with high energy users, like steel and aluminium, which the ALP is on record for protecting, given their vital importance to defence needs, infrastructure and transport.

  With all this said, there will be individual companies which will benefit from the above and I mention the following as a starting point in our chosen area of small caps. I’d love to think other strawmen might comment on some of these.

 Bisalloy (BIS) - its market cap of under $100m belies the fact that it is the only quench and thirst steel manufacturer in Australia. Think tough tank steel plating or the Bushmasters we have recently shipped to Ukraine, and you have quench and thirst. Important to keep this capacity in Australia? I would think so. And is defence a growing part of the government spend? YES. And can it win deals overseas? YES, and it has done so recently (16 May) via the partnership with South Korean company Hanwha in a $1.7bn contract to supply Egypt with howitzers. Intriguingly BIS have not announced this to the market at the time of writing.

I would also expect BIS to share in some of the AUKUS spoils in due course.

 Other small cap manufacturing companies which might benefit here are Capral (CAP), Laserbond (LBL) and XTEK (XTE).