What kind of economic impacts will there be as a result of state and federal responses to the COVID-19 pandemic?
We are witnessing rapid change daily through the peak of the COVID-19 pandemic. Most of us, including our team at CICA, have modified our working arrangements by contributing remotely from home, and through a much lower reliance on travel, time in the office and the use of “zoom” rather than “in person” meetings.
The big question for our industry is whether the economic impacts immediately felt due to reactions by both domestic and international governments to the pandemic will disappear as quickly as they arrived, or linger, causing long term implications to our businesses. I feel the answer will be a combination, depending on your market niche, your internal business structure and your ability to adapt.
We are noticing a very fine line between those member businesses whose trade is heavily impacted, or only marginally impacted by government trade restrictions. Those with a market niche heavily skewed toward large government funded infrastructure projects, to this date, have noticed a marginal decline in demand. Some impact is noticeable in smaller construction projects but for the most part, construction as a group is pushing through as best as it can, in part attributable to industry and employee groups working together to lobby government against restrictions in this sector. In the industrial sector, those reliant on imported inputs have cut production rapidly and cut maintenance spending budgets to match. At the opposite extreme, those members supplying the entertainment and stage building sector had all foreseeable work cancelled overnight causing an immediate impact to planned workflow.
The underlying issue confronting us all, regardless of whether we operate a hire business or market our goods and services to crane hirers, is the extreme level of uncertainty generated by the COVID-19 pandemic. The federal government’s position remains “at least six months” before we can attempt a path back to normality.
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Our internal business structure will play a vital part in how we can adapt to the current trading environment. Our two greatest inputs, labour expenses and the cost of capital need to be carefully managed, particularly if your business is trading in a niche market most heavily impacted by restrictions. One major part of this, the value of our machinery, is very much front and centre in the “uncertain” category. Machinery values underpin the very foundation of small/medium equipment hire businesses as most privateers will build machinery equity, then acquire and grow the equipment pool to minimise tax exposure rather than hold large cash reserves. In the current environment, this structure is risky, particularly for those more highly geared as they face exposure to “asset deflation”, the business killer for any capital-intensive enterprise.
So why would asset deflation become such an immediate risk? Unfortunately, the answer is entirely out of our control and lies fundamentally with international currency movements coupled with how our local banks and lenders react.
For our own currency, the Australian Dollar always shows volatility against the US dollar during international uncertainty. We have now witnessed 18-year lows over the preceding weeks. This can be an issue for us purchasing business supplies out of nations trading in US dollars, obviously such as China. To the most part though, our major machinery purchases are out of Europe, particularly our All-Terrain cranes, and as such, we are most interested in the Australian Dollar relative to the Euro. Over the last 12 months, this has been fairly stable, around the .61 mark. We witnessed a rapid decline in mid-March reaching a floor as low as .51. This kind of volatility is devastating to hire businesses maintaining confidence in ordering new equipment.
The volatility of funding equipment during times of currencies bouncing between extremes makes planning very difficult, particularly in our businesses which are all highly capital intensive and of mainly imported equipment. This makes taking up government investment allowance subsidies, such as the $150,000 immediate tax deduction on new acquisitions, a decision to consider very carefully, unless of course, you choose to buy Australian, in Australian dollars.
So, this leaves us with our ability to adapt. Regardless of how your business is structured, during these times of extreme uncertainty which has generated equally low levels of confidence, we must adapt to protect ourselves against devastating economic impacts out of our control. So please, carefully consider your management of two most very crucial business parameters whilst market volatility is at an extreme; being your asset values relative to finance costs, and your expenditure on labour relative to your generation of revenue. It has been pleasing to note many local lenders, including the major banks have been forthcoming with support packages for business, definitely something worth considering talking to your relationship manager about during this time to help manage your finance costs and monthly commitments. Equally as pleasing is the announcement of the Jobkeeper package by the Federal government, again certainly worth considering and may help protect against rising costs of idle labour.
CICA is very keen to see our members successfully navigate through this particularly unusual, and at times, difficult period and there are many resources available to CICA Members. CICA Assist is available to help you understand workplace relations and obligations. There are webinars being made available on the CICA YouTube channel and don’t forget a program like CrewSafe provides opportunities to upskill during quieter times.
Outside of the immediate rigours that the COVID-19 pandemic has caused, I would like to reflect on the contributions made by all volunteers across CICA nationwide, particularly during the National Volunteering Week between 18th to 24th May. Volunteering is an essential part of our association. The very foundation of CICA and the state branches were formed solely through volunteering and it is those who now hold the mantle who continue this very important function. In recent editions of this publication, those volunteers elevated to ‘Hall of Fame’ status have been specifically acknowledged. These individual volunteers have displayed exceptional levels of dedication over many years to CICA and the board again thanks them for their contributions. Furthermore, we would like to extend our gratitude to the many hundreds of branch level volunteers who continue to build momentum for improvements in our industry every week.
Unfortunately, these efforts will not be on display this year. Due to the uncertainty we currently face, CICA has been forced to postpone our national conference in Perth to be held now one year later in 2021. I’m sure when the opportunity allows, and we do meet again, we will make up for any lost ground.
In the meantime, I wish you all the very best, I hope you and your families do all that you can to stay safe and healthy.
Managing Director – McKay United