Capital expenditure is a much debated topic in our industry: what to by, when to buy, if to buy? There are signs that there's never been a better time to invest in production, automation and IT systems, and that 2022-23 will see a noticeable spike in business activity. Before inflation and raw material price rises grip you, along with inevitable interest rate hikes - will you be ready, asks Wideformat Online publisher Andy McCourt, identifying four key trends.
|Capex can be equipment, systems, vehicles or any asset that helps your business produce more efficiently|
There's nothing quite like the feeling of pride and achievement when firing up new kit, knowing that with every turn of the cylinders, transit of the bed, swathe of the printhead carriage or rewind of the printed material; profit will eventuate - or should do anyway. Add to this front-end automation and W2P that makes capturing the work so much easier and cheaper.
The catalyst for this article is a news release from major manufacturer Bobst of Switzerland. In traditional Swiss precision, Bobst, who has footprints in both conventional and digital inkjet technologies, nailed a major reason why now and the next six months represent a watershed time to re-equip graphic reproduction businesses.
Equipment price increases
Bobst has openly identified the following 'rapidly increasing' price increases in raw materials used in the manufacture of its machinery:
- Raw material used for machine frames and components has increased far beyond projections. The price of hot rolled steel plate hit record prices in July 2021 and has increased by 119% since January 2020. Cold rolled steel plate has increased in price by 126%
- Structural sections and beams have increased in price by 91%. Aluminum alloy by 75% and copper by 65%
- Raw material usage for mechanical components (LLDPE Resins, nickel, polyurethan, etc.) has increased by more than 40% since September 2020 and materials used for commercial parts (belt, chains, lubricants, rolls, etc.) have increased on average by 9%
- Freight prices have also increased since August 2020 – sea by 216%, air by 200% and road by 5%.
These are unprecedented increases and, while some are expected to come down somewhat as pandemic measures subside, only the most optimistic optimist would expect them to return to pre-pandemic levels. Kudos to Bobst for the analysis and also for keeping end-user price increases down to just an average of 5%.
Jean-Pascal Bobst, CEO of Bobst Group notes: “According to various sources and analysts, the significant disruption of production will continue to impact pricing and logistics in 2022. It’s unfortunate for the industry but we have to reinforce our supply chain, parts delivery and logistics which now results in these pragmatic measures to ensure supply availability.”
Make no mistake, such increases in raw inputs will affect other manufacturers, wherever they are located. There are deals galore on equipment at the moment but no one in history has ever bucked the 'Supply-Demand' equation in marketing. Once supply gets constrained, prices will go up.
Interest rates and inflation
The second reason why the next six months should see your business doing some serious capex is interest rates. These are linked to inflation and Australia is doing better than most of the world at around 3% average inflation. Interest rates are at historic lows - money has never been cheaper. This will not last. Interest rates won't suddenly jump but, according to Reserve Bank Chief Philip Lowe:
"The (Reserve) Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. This will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently. This is likely to take some time. The Board is prepared to be patient, with the central forecast being for underlying inflation to be no higher than 2½ per cent at the end of 2023 and for only a gradual increase in wages growth."
So interest rates will go up in the longer term, not by much but they will go up.
Instant tax write-off
Thirdly, there is the ATO's 'instant tax write off' for assets up to AUD$150,000, which sits nicely for common capex by SME businesses in the Sign, Display and general print sector. It's not the easiest to understand and I am no tax expert, so do consult your accountant, but in a nutshell:
A capital expense is either the expense of a depreciating asset – this includes both the amount you paid for the asset and the expenses from transporting and installing it or it can be an expense associated with establishing, replacing, enlarging or improving your business.
Temporary full 'expensing' is like 'fast depreciation' and supports businesses by encouraging investment, because eligible businesses can claim an immediate deduction for the business portion of the cost of an asset in the year it is first used or installed ready for use for a taxable purpose. Emphasis on 'installed and ready for use'. If you order in June 2022 and it is delivered in July 2022, that's a new tax year and new rules might apply. Instant asset write-offs are a temporary measure but have been extended under the Morrison government for the expressed purpose of stimulating investment.
With our PacPrint trade show on at the end of June, that might mean capital purchases made there or soon after will have to be addressed in the 2022-23 tax year, but if you want 'jam today' you need to have the new kit purring away before June 30th.
Stuff is getting better
Fourthly, and with apologies to actor Kevin Costner who used the 'Stuff is getting better everyday' line in the forgetable film The Postman, a post-apocalyptic recovery drama, stuff really is getting better, after our winter of covid discontent.
Of significance to sign and display producers, the exhibition centres are once again hosting events. Stands need designing and building with graphics, SEG walls, flags, backlits, bunting, posters, pull-ups and so on.
Shops, restaurants, hotels and showrooms are re-opening and their 'look' needs to be refreshed. Re-shoring of work previously sent to cheap and often dodgy offshore shops is a happening thing, aided by the high cost of shipping from far away production. Recovery is always gradual but it is a bankable trend - new and more productive kit and systems will not go out of style and may well be the difference between making a decent quid or just surviving.
Yes, stuff is really getting better.