Australia Sector report

February 2021

Sectors @ a glance

Industry performance outlook

Agriculture

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Automotive/ Transport

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Chemicals/Pharma

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Construction/ Const. Materials

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Consumer Durables

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Electronics/ICT

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Financial Services

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Food

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Machines/ Engineering

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Metals/Mining

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Paper

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Services

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Steel

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Textiles

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Agriculture

The arrows in this overview represent the direction of change in the Atradius outlook for the industry since the previous update. No arrow will appear if there has been no change in our overall outlook.

Remains Fair Agriculture value added is forecast to grow by more than 8% in 2021 after a 4% contraction in 2020. The sector was partially impacted by lockdown measures (e.g. transport and supply chain issues).

After years of prolonged drought, the east coast of Australia recorded the first favourable weather conditions since early 2020, positively affecting the sector and the grain harvest in particular. The west coast is still experiencing drier than average weather conditions.

China has imposed tariff of 80% on Australian barley, and an export ban of eight of Australia’s largest abattoirs have hurt related segments for beef and lamb. China has also imposed restriction on lobster and cotton and might target wheat. Following an anti-dumping investigation into Australian wine by the Chinese government, Beijing has imposed tariffs on Australian wine of up to 212%, starting since the end of November 2020. Given that China is the largest export destination for wine, this has had a negative impact on the segment’s credit risk. The strained relationship with China (with potentially more import bans and tariffs) remains a downside risk and a threat to the sector as a whole, but it also creates opportunities to expand business relationships with other countries in the Asia-Pacific region.

Automotive/Transport

Remains Poor Automotive value added is forecast to rebound modestly by 2.5% in 2021 after a 11.5% contraction in 2020. Sales have started to recover since November 2020, underpinned by an instant asset write-off tax break scheme implemented by the federal government. With international travel banned, many people started using cash to upgrade their vehicles as the economy began to improve. The share prices of ASX-listed vehicle groups have been experiencing rises over the past few months.

However, it is expected that smaller automotive and transport businesses already struggling before the pandemic will face difficulties. For those companies, payment delays and defaults will increase as soon as government subsidy payments and insolvency protection laws expire. Therefore, in H1 of 2021, a slight increase in insolvencies is expected for the industry.

Chemicals/ Pharmaceuticals

Remains Fair The chemicals industry contracted slightly in 2020, with decreases in demand, shrinking revenues and supply chain disruptions due to the pandemic. However, value added is forecast to rebound by about 2.5% in 2021. Understanding the shifting demands across end markets, such as agriculture and mining, will be a key aspect for the recovery of chemicals manufacturers.

Last year, pharmaceutical retailers were heavily impacted by store closures, accelerating the shift towards online sales. Pharmaceuticals manufacturers and wholesalers performed well in 2020, benefiting from the global surge in demand for health products. This trend is expected to continue in 2021, with industry value added forecast to grow by almost 4%.

Construction/Construction Materials

Remains Poor Construction value added is forecast to rebound modestly (by 0.5%) in 2021 after a 9% contraction in 2020. After an already difficult year 2019 for the industry, the economic downturn last year has increased the already elevated credit risk of many construction companies, especially smaller players. The government is stimulating the sector with the “HomeBuilder” program worth AUD 680, and it is looking to fast track infrastructure projects worth AUD 72 billion over the next two years. The “HomeBuilder” program has been extended until end of March 2021. This means it is expected to support the construction or major rebuilding of an additional approximate 15,000 homes, bringing it to a total of around 42,000 homes across Australia.

Consumer Durables

Remains Bleak Retail value added is forecast to rebound modestly (by 2.5%) in 2021 after a 5% contraction in 2020. Private consumption of non-food consumer goods deteriorated due to the coronavirus impact, with many brick-and-mortar retailers temporarily closed due to lockdowns. While the pressure on this segment has risen, e-commerce operators have sharply increased their sales. Electrical household appliance retailers have benefited, as consumers are working from home and have upgraded some of their household appliances (e.g. coffee machines, computer electronics, refrigerators, etc.) Since November 2020, the retail sector has started to rebound, boosted by a fully opened Victoria and record sales on Black Friday, with large nation-wide increases in clothing, footwear and department store sales. However, it is expected that retail insolvencies will increase in Q2 of 2021, after the expiry/scaling back of stimulus measures (e.g. Job Keeper and Job Seeker).

Electronics/ICT

Up from Fair to Good ICT continues to remain a profitable sector, and value added is forecast to increase to 5% in 2021 after growing 3% in 2020. Payment experience has been good, with cash flows benefiting from government subsidies. The level of protracted defaults and insolvencies remains low compared to other industries.

The shifting of daily life online, along with remote working and learning, have been some of the most far reaching consequences of the pandemic, accelerating digital transformation. Online sales of IT hardware, home office equipment and online gaming products have increased.

Financial Services

Remains Good Profitability in the sector remains impacted by very low interest rates in Australia. Loan defaults have increased, especially mortgages, with data showing more than 1.4 million Australian households in mortgage stress. Loan defaults are expected to increase further after government stimuli (e.g. JobKeeper) end in March 2021. However, the sector remains robust so far, able to cope with those challenges. Finance value added is expected to decrease only slightly, by about 0.5%, in 2021.

Food

Remains Good Food value added is forecast to grow 4% in 2021 after a 2% contraction in 2020, as the sector is progressively recovering. The industry has been impacted by the consequences of lockdown measures (e.g. transport and supply chain issues). Food and beverage wholesalers and smaller retailers exposed to the food service and hospitality sectors were impacted by lower demand as a result of government restrictions.

Machines/Engineering

Remains Fair Engineering value added is forecast to grow 3% in 2021 after a 5% contraction in 2020. Companies in this industry are generally financially resilient compared to other industries. Demand from key buyer sectors like construction and mining has decreased, while demand from the agricultural industry has increased.

Metals/Mining

Remains Fair Mining value added is forecast to grow 1.5% in 2021 after a 0.2% contraction in 2020. The outlook for Australia’s commodity exports has improved over the past three months. Iron ore export earnings are set to reach an all time high given the strong demand from China and supply problems in Brazil. While price conditions are challenging, demand for metals such as lithium, copper, nickel and zinc is increasing, due to the rise of electric vehicle, batteries and renewable energy use. In contrast, coal has been hit by low demand due to the pandemic and a recent export ban from China as a key export market. Liquefied natural gas exports earnings are expected to decline due to weaker global prices and demand.

Paper

Remains Poor In 2020 paper producers were impacted by reduced demand due to the lockdown measures, lower economic growth and the ongoing digitalization process. The commercial print segment continues to struggle, as the coronavirus pandemic has accelerated the long-term trend of downstream demand. Businesses have cut down on discretionary and advertising spending, and demand for physical advertising material has declined, due to advertising shifting increasingly towards online channels. Despite wage subsidies and very tight cost controls, most companies have been unable to offset the adverse impact from lower revenues. Once government stimulus measures end after March 2021, rising insolvencies in the commercial print segment are expected.

Services

Remains Bleak Due to the lockdown measures, many segments have suffered sharply deteriorating revenues, especially hotels and catering, restaurants, bars, entertainment and cultural events, travel agencies and tour operators. The entertainment, hotel and restaurant industries have in recent months seen encouraging signs of business growth across Australia. Leisure demand from domestic markets continues to pick up, as people are unable to travel overseas. However, the outlook remains uncertain and is largely dependent on the development of new infection numbers in the country. Hotel and catering value added is expected to rebound just 14% in 2021 after a 31% contraction in 2020. Insolvencies are expected to increase in Q2 of 2020, especially in the hotel sector, as occupancy rates will not return to pre-coronavirus levels in most states until 2022 at least, as international travel is off the cards for the time being.

Steel

Remains Poor Steel value added is forecast to contract 2% in 2021 after a 16.5% decrease in 2020. While increased demand in China has prevented the worst scenario, demand remains low in other countries. Steelmakers are suffering from slim profit margins due to still elevated iron ore prices. The steel wholesale segment is partly recovering due to increased demand from local and state government projects.

Textiles

Remains Bleak Textile value added is forecast to contract 0.3% in 2021 after a 17.5% decrease in 2020. Wholesalers and retailers are negatively affected by changes in customer behaviour and increased competition from new online retailers. Their performance has further deteriorated due to low sales during the lockdowns. Many businesses engaged in synthetic and natural textile manufacturing (e.g. yarn and wool fabrics) are expected to close, while others offshore operations or turn to cheaper imported products to cut costs and improve profit margins. Currently, many suppliers are offering extended payment terms. It is expected that insolvencies will increase as of Q2 of 2021, especially among some small and unprofitable businesses, such as carpet manufacturers.

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