Australia: stimulus helps but is it enough?
By Murray Pollok28 September 2010
The Australian rental market was relatively lucky last year - the country's economy was one of the few to grow, and the government helped with a substantial stimulus programme. Murray Pollok talks to renters in the country.
Unlike Europe and North America, the Australian economy didn't go into recession in 2009 - it saw 2.7% GDP growth. Even so, it was impacted by the global financial crisis, which meant that Australia's rental companies didn't escape entirely.
"Most rental companies did have a fall between 5 and 10% last year", says Jeremy Hill, group manager for strategic marketing at Coates Hire, the country's largest rental company. "Our revenues declined by about the same amount."
Mr Hills tells IRN that the market would have been worse but for an Australian economic stimulus plan that boosted investment in infrastructure and schools. In fact, construction and building related spending represented almost 70% of the A$42 billion stimulus announced in February 2009.
While that helped many rental companies, it was a softening in the mining sector that had the biggest impact on Coates, with some second tier mining projects put on hold because of the economic uncertainty. Mr Hill says its operations in Queensland and Western Australia were the most affected.
However, Mr Hill says Coates is now back in growth mode following the rationalisations that accompanied the merger of the Coates and National Hire businesses in 2008.
"Six months ago we started building back up", he says, "We've recovered from the downturn and this financial year [to June 2011] our plans are to leverage growth." This will mean 20 new depots and something like 200 additional staff.
The new depots will mainly be in support of regional activity, including oil and gas projects related to investments off the North West Shelf and off the coast of Queensland. The biggest project is the A$43 billion Gorgon natural gas project on Barrow island off the coast of Western Australia, being built by Chevron, Exxon Mobil and Shell.
Growth mode also means acquisitions. Coates recently made its first purchase since the National Hire merger, acquiring Monash Hire, a five-branch rental company based in Mt Waverley, Victoria. (This also happens to include one branch in New Zealand, which Coates says will allow it to monitor opportunities there.)
"Our eyes are open again", says Mr Hill, "There still seems to be good opportunities out there. Some businesses are doing OK, some are fairly strained."
The Australian mining and natural resources sector is also important for Aggreko, the power and temperature control renter.
Asterios Satrazemis, the ex-United Rentals executive who joined Aggreko North America several years ago, and who since April this year been based in Melbourne as managing director of Aggreko Australia Pacific, tells IRN that Aggreko also sees opportunities in mining and large infrastructure projects. "Australian never did go into recession, and we continue to see growth...With Aggreko, the sectors that we see [with most opportunities] are mining, utilities, oil and gas and major infrastructure construction."
The Australian business falls into Aggreko's ‘local' category (which means smaller scale, branch-based business), and in fact it represents the largest share of Aggreko's local business in its ‘international' territory, which excludes Europe and North America. The total international local business amounted to £97 million last year.
Mr Satrazemis says the mining sector has come out of the slowdown last year that saw some marginal projects put on hold; "A lot of new projects for new mines have fired up again. The work has started and there are good signs for the second half of 2010."
The mining sector has recently been subject to further uncertainty as Kevin Rudd's government had planned a 40% ‘super tax' on mining companies - a tax that could have had an impact on investment levels. However, the threat of the tax appears to be receding slightly following the appointment of Julia Gillard as successor to Mr Rudd as prime minister. You can bet that Australia's rental companies will be hoping that the tax is scrapped altogether.
Like Coates, Aggreko plans to expand its operations in Australia, with the current network of 16 locations to be boosted to 20. The company uses a hub and spoke model for the network, and the aim of the expansion, says Mr Satrazemis, "is to try to get closer to customers" by following them wherever they develop new mines or other operations.
In mines, Aggreko supplies power for temporary camps for construction workers or power during planned shut-downs. It also supplies temporary cooling to supplement or replace installed mine cooling systems. For example, it recently supplied a temporary chilling plant for a mine in central Queensland that was relocating its permanent chilling plant. This alone comprised four 1.4 MW water coolers, four cooling towers, four condensing pumps and three 1000 kVA generators.
Large infrastructure projects are also helping the company, one example being the supply of ten 1250 kVA power units to provide power for tunnel boring machines being used on the construction of the A$3.5 billion Victoria Desalination Plant, which will supply freshwater to Melbourne.
The company, which has been working in Australia for 16 years, also sees opportunities to promote the use of its natural gas gensets against diesel generators. These are ideal if you already have a source of natural gas, and, says Aggreko, cost savings can be dramatic. (It cites the example of around 70% savings on a 5 MW gas power plant working continuously for a year.) "That's a big opportunity going forward", says Mr Satrazemis.
With a slightly more pessimistic view of market prospects is Mark Burton, managing director and co-director - with his wife, Patricia - of Barossa Valley Hire, based in the Barossa wine growing region of Australia around 70 km north of Adelaide.
Mr Burton, whose company recently won for the second time the small rental company of the year award at the Hire & Rental Industry Association (HRIA) annual convention, says the current financial year - to the end of June 2011 - could be challenging; "The next 12 months is going to be hard. The stimulus package is starting to come to an end, and I don't see anything coming on behind it."
It is 17 years since he and his wife acquired the company, and in those years it has managed to grow steadily, especially over the past five years after Coates Hire opened up nearby. Mr Burton says that competition triggered Barossa Valley to become much more proactive in chasing business and has - ironically - been key to the company's growth. Even last year, despite a general slowdown, revenues were up 10%.
Making life more difficult for him now is the fact that the local wine industry - which in good times has represented up to half of the company's turnover - is slowing down because of an oversupply of wine. This has led wineries to cut back on capital investment.
Mr Burton, who acknowledges that he is a pessimist, tells IRN that he will hold back on capital investment this financial year, at least until December, and also try to expand the company's customer base.
His pessimism isn't necessarily shared by economists, who are predicting GDP growth of around 3.0% this year for Australia. That is unlikely to persuade Mr Burton. "I've always been cautious", he says, "and it has served us well for 17 years."
Kennards Hire has started a project to fit solar panels at many of its hire centres. A 52 panel, 10 kW system was trialled at the company's St Marys location in New South Wales earlier this year and as many as 20 systems will have been installed at Kennard locations in the State by this summer.
Each installation - supplied by SolarSwitch - generates around A$9000 worth of power per year and the total A$900000 investment (after rebates) will pay for itself in around 4 years and then generate free electricity for 20 to 30 years. The systems will also save over 13 t of greenhouse gas emissions annually.
"Installing a solar system is a great way to reduce Kennards Hire's carbon footprint and lower our power consumption", says Cameron Kennard, managing director of Keneco Property, which manages the company-owned sites, "It will also have the added benefit of reducing our energy bills".