Caution on cost cutting

PriceWaterhouseCoopers warns that cost-cutting is not the entire solution to the iron-ore industry's productivity problems. Picture: Colin Murty Source: The Australian

RAPID fire cost-cutting in Australia's iron ore and coal industries spurred a long-needed productivity burst in the three months to December, a report says.

But the report by global consultancy PricewaterhouseCoopers warns austerity is not the entire solution to the sector's productivity puzzle.

It calls for an overhaul of corporate structures and a rethink of business processes, including increased automation, as it says businesses should make more from existing assets.

The report says the most immediate evidence of the productivity shake-up producing results was the radical shortening of hours worked, with the coal sector having an almost 40 per cent drop in the second half of last year.

Hours worked also dropped in the iron ore sector by 10 per cent in the last quarter of the year.

Resource companies also made savings through deferring major projects and by instituting short-term austerity measures. The report comes amid a flurry of cost cutting in the sector.

PwC's Energy, Utilities and Mining leader Jock O'Callaghan said productivity improvements would continue this half, but cautioned against industry taking a stringent "austerity" approach.

Mr O'Callaghan argued savings would be unlocked through a "greater investment in processes" and "changing the way the industry does business".

"Cost-cutting should mark the first phase in a long-term plan to improve productivity."

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RBA's high dollar a factor in cutting rates

Make: CanonModel: Canon EOS-1D Mark IIIDate/Time: 2008:05:06 13:31:30

THE Reserve Bank is keeping an active watch on the strength of the Australian dollar when setting interest rates.

RBA governor Glenn Stevens today told a parliamentary committee the exchange rate was still higher than would be expected considering the official cash rate is at record low of 3 per cent.

Future rate cuts remain under active consideration, he said as the economy is likely to grow a little bit below the level of 2012.

But Mr Stevens was upbeat the rate cutting cycle that has seen official rates drop by 1.75 per cent since November 2011 was having an "effect'' and the property market was showing signs of recovery.

"Housing prices have been rising since last May, having declined for a period prior to that,'' he said. "Share prices have also risen quite significantly and, if anything, by a little more than in comparable markets overseas."

"The returns available to savers on safe assets like bonds and bank deposits have fallen by enough to prompt Australian savers to consider shifting their portfolios towards other assets.

"These are channels of monetary policy at work,'' Mr Stevens said.

He also said the high level of household savings was a good thing and more normal than the pre-GFC period when household debts outstripped savings levels.

"Households do not feel the same ebullience they did for some years prior to the financial crisis in major countries. But that degree of confidence, with its associated patterns of saving and increasing leverage, was unusual, and is not likely to recur,'' he said.

The RBA governor also admitted that while the eurozone has avoided catastrophe it is still faces immense challenges that could derail the global outlook.

But Mr Stevens was upbeat the US economy was on the road to recovery and was as likely to surprise on the upside as it was to shock on the downside over the coming 12 months.

Meanwhile, the RBA said the mining investment boom is close to its peak.

Mr Stevens said he expected investment in the mining sector to peak soon, though it would remain at elevated levels for some time.

"Looking ahead, it appears that the peak in the level of resource sector investment is now close," he said. "It is a very high peak, but we do not think that there will be a rapid decline in the near term after the peak."

Mr Stevens said investment spending in other parts of the economy remained subdued but would strengthen following the peak in the mining sector.

"Investment spending by businesses in other sectors has thus far remained somewhat subdued in comparison," he said. "There are good reasons to expect it will strengthen in due course, but the available indicators at present do not suggest that is going to happen in the very near term."

With AAP.

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