CATERPILLAR GLOOMY AS COMMODITIES DOWNTURN

C O N F I D E N T I A L SECTION 01 OF 02 MELBOURNE 000009

NOFORN
SIPDIS

E.O. 12958: DECL: 01/15/2019
TAGS: ECON EIND ETRD AS
SUBJECT: CATERPILLAR GLOOMY AS COMMODITIES DOWNTURN
CONTINUES

REF: 08 CANBERRA 1222

Classified By: Justin Kolbeck, Pol/Econ Officer, reasons 1.4 b, d

Summary
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1. (C/NF) Tamera Nelson, Caterpillar's Managing Director for
Melbourne and Tasmania, expects to lay off nearly one third
of her workforce this year (strictly protect) due to sagging
commodities prices and complex new industrial relations
legislation. As the commodities slump continues to drag on
the wider Australian economy, most business and government
leaders are betting that a turnaround will occur sooner than
later. End Summary.

Tough Times Ahead
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2. (C/NF) U.S. citizen Tamera Nelson, Caterpillar's Managing
Director for Melbourne and Tasmania, told pol/econoff on
January 13 that she expects a tough 2009 despite strong 2007
and 2008 results. Low commodities prices and slowing mining
operations throughout Australia have translated into reduced
demand for Caterpillar's products. Nelson believes that she
will have to lay off at least 350 of Caterpillar's 1,120
employees in Australia in 2009 (strictly protect). According
to Nelson, this is due in part to new industrial relations
legislation brought in by the Rudd government in November
2008 (reftel). Ambiguity in the new laws, she said, will
likely force her to lay employees off rather than reduce
hours or institute a temporary halt in plant operations.
Caterpillar's legal team is still sifting through the new
laws, but Nelson was visibly frustrated by the uncertainty
caused by the new legislation.


3. (C) Tougher industrial relations laws are also making
Caterpillar's Australian operations less competitive, Nelson
said. The company is not due to renegotiate its payroll
contracts until 2011. Automatic 4.3 percent pay raises are
built into these contracts. Nelson fears that slumping
demand for Caterpillar's products combined with mandated
raises will make Australia less competitive vis-a-vis the
company's other off-shore centers in South Africa, China,
Indonesia and Mexico. Nelson stated that a weaker Australian
dollar has not helped Australian operations because her
organization is required to import a significant number of
component products.

Boom to Bust
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4. (C) Nelson said that she and other senior management at
Caterpillar were "shocked" at how quickly the commodities
"super boom" turned south. Caterpillar was not prepared for
the reversal which took place within 30 days, and Nelson said
that she was "uncertain" when the bust would turn around.
She also expressed concern over recent Chinese demands to
negotiate coal and iron ore contracts four times per year.
(Comment: These contracts are presently negotiated annually
and industry leaders fear that frequent renegotiation could
lead to lower average prices. Economists believe that
contract renewals, which are due in April 2009 could lead to
a halving of prices. This could slice as much as A$30
billion (US$20 billion) off of Australia's export receipts,
and 2.5 percent off real national income -nearly triple the
Rudd government's recent stimulus package. End comment.)


5. (C) Nelson, who was previously posted in China, said that
she was surprised at how quickly Beijing could turn off (or
on) demand for a product. Without going into detail, she
noted that orders for a particular product dried up entirely
within 24 hours after the Chinese government announced that
it was pulling support for an infrastructure project. Nelson
hoped that resumption in Chinese demand would resume as
quickly as it has fallen off.

Unwelcoming Shores
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6. (C/NF) Nelson, based in the northern Tasmanian city of
Burnie for two years, said that doing business in Tasmania
has been a "challenge." She opened the meeting by describing
a month-long debacle that erupted in Tasmania when she
decided to change the company's annual "Xmas" party to a
"holiday" party. Angry Tasmanians bombarded her with
complaints and Nelson even expressed a concern for her safety
during the holiday season. She said that she would not ride

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her bike in Burnie out of a fear of "being run off the road."
The reaction, she said, was due to the isolated and
"provincial" nature of northern Tasmanians and stated that
she was not prepared for the resistance she would encounter
in Australia. Caterpillar is the first or second largest
employer in Tasmania and Nelson indicated that the reaction
to lay-offs would be much more negative than anything she had
confronted so far.

Comment
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7. (C) Caterpillar's challenges are similar to those faced by
most companies in the Australian mining business. Mining
giant Rio Tinto announced on January 14 that it would save
A$340 million (US$229 million) by suspending underground
development at its Northparkes copper/gold mine in New South
Wales and by shelving a plan to develop driverless trains in
Western Australia. OZ Metals, which is battling a mountain
of debt, announced on the same day that it would suspend
operations at its Scuddles mine in Western Australia.
Caterpillar's finance arm also faces new difficulties caused
by fall-out from the global financial crisis, telling Embassy
Canberra it finds itself less competitive since the Rudd
Government extended wholesale funding guarantees to
authorized deposit-taking institutions (ADIs). Now
Caterpillar finance is considering converting to ADI status.
Although the company clearly faces near-term challenges,
Nelson was relatively upbeat regarding the company's longer
term presence in Australia.
GRANT