ANALYSIS: Manufacturing becoming a memory in Australia

By Sid Astbury Aug 23, 2011, 7:10 GMT

Sydney - When announcing the loss of 1,000 jobs this week, BlueScope Steel chief Paul O'Malley explained that Australia's mining boom and its rising dollar had whipped up a perfect storm that could sink manufacturing.

High-paying mining jobs are sucking workers out of factories and driving up the wages of their replacements. For BlueScope, which has to pay the same high prices for coal and iron ore as Asian rivals, the answer is to cut production and cut jobs.

O'Malley warned against listening to economists who argue that it is all for the best and Australians should welcome the shift from making things to digging things up.

'We shouldn't kid ourselves that we can sit back and enjoy the benefits of the mining boom because one day that will be over and there may be very little left,' he told reporters.

Some disagree. They see a never-ending mining boom and no need to worry about manufacturing.

Rob Burgess, writing on the Business Spectator website, predicted that 'it would take something like mass social unrest in both China and India - together home to about a third of humanity - to kill off long-term demand for our commodities.'

The government responded to BlueScope's woes by providing payments that will help keep blast furnaces open in the hope that better times will return.

'Our Australian dollar is strong and it's going to stay strong,' Prime Minister Julia Gillard said when coming to the rescue of BlueScope. 'I'm an optimist about a long-term role for manufacturing.'

It is the strong Australian dollar that is whittling away at manufacturing, at tourism and at the services industry. What would really help keep BlueScope's blast furnaces open is a fall in the value of the local currency.

Engineering that fall is beyond the capacity of the government. The generous exchange rate also keeps imports cheap and puts a damper on inflation.

Financial services firm Bank of America Merrill Lynch foresees many lay-offs at manufacturers like BlueScope that are losing competitiveness and has urged the central bank to drop interest rates to stimulate domestic demand.

Reserve Bank of Australia deputy governor Ric Battelino told a business lunch on Tuesday that there is a case both for tightening and for easing off.

'The effects of the mining boom have turned out to be stronger than expected a year ago, the terms of trade are noticeably higher, and forecasts for national income and mining investment have been revised up over the year ahead,' Battelino said.

'Despite this strength in the mining sector, overall economic growth is turning out to be weaker.'

Cutting interest rates would reduce returns to those holding the local unit and see it slide against other currencies. Cheaper borrowing would help hard-pressed non-mining businesses and inspire Australians to get out to the shops more.

Classical economists see the strong Australin dollar and the booming mining sector getting rid of the flabby parts of the economy. Ultimately, they say, the tonic spreads wealth.

But the government, along with trade unionists, sees joblessness and disaffected voters. Gillard is resisting calls for the steel industry and other parts of manufacturing to receive tariff protection or to get special treatment in the award of government contracts.

She said she would be steadfast against calls for a 'retreat into protectionism' or for her government to become 'anti-foreign investment.'