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Price increase by Australian Paper Manufacturers Limited and Cellulose Australian Limited

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I have today been notified by Australian

Paper Manufacturers Limited and Cellulose Australia

Limited in the following terms:

. "Australian Paper Manufacturers Limited and its

wholly owned subsidiary, Cellulose Australia

Limited, will conform with the findings of the

Prices Justification Tribunal's report dated

24th October 1973 and the two companies will

increase the domestic selling prices of their

paper and paperboard products by an overall

weighted average of six per centum with effect

from 31st October 1973". .

The companies' revised price lists have

been supplied and are available for inspection at

the offices of the Prices Justification Tribunal,

4 Treasury Place, East Melbourne. .

30 October 1973

f ς



5e> · < o ■73



AND ‘ *




I have received the attached report of the Prices Justification Tribunal on certain price increases proposed 1 by Australian Paper Manufacturers Limited and its wholly owned subsidiary Cellulose Australia Limited. The report is available to the

public and may be inspected at the offices of the Prices Justification Tribunal, 4 Treasury Place, East Melbourne.






(Proposed overall weighted average increase

in prices of 6 «75 per cent)

- 24 OCTOBER 1975 .



'This.Is,the second public inquiry conducted by .

the Prices Justification Tribunal pursuant to the provisions

of the Prices Justification Act 1975? and it relates to a

notice given by Australian Paper Manufacturers Limited and

its wholly owned subsidiary, Cellulose Australia Limited

(hereinafter referred to jointly as A.P.M.) on 10 August

1975 that they proposed to increase the domestic selling

prices of paper and paperboard products as set out in their

current official price lists by an overall weighted average

increase of approximately 6.75 per cent. The operative

date of the price increase was proposed to be 10 September


The Tribunal by notice dated 50 August Ί 975 advised

A.P.M. that it intended to hold an inquiry as to whether

the prices proposed by it were justified and on

7 September 1975 in accordance with section 19 of the Act

the Tribunal advertised in the Australian Government

Gazette and various newspapers that it proposed to hold an



Pursuant to section 22 the Chairman of the Tribunal

made a determination that the powers of the Tribunal should

be exercised by a Division comprising himself, Mr T.A. Pettigrew

and Dr A.H.M. Pels.

The inquiry commenced on 13 September 1973 when,

in addition to A.P.M., The Printing and Allied Trades

Employers’ Federation of Australia, and the Pulp and Paper

Workers’ Federation of Australia applied to be made parties.

These applications were granted.

Counsel were also appointed to assist the Tribunal

and as well as directing a series of questions to A.P.M.

they put comprehensive submissions to the Tribunal. The

abovementioned questions were fully answered by the A.P.M.,

largely in the form of oral evidence and tabulations tendered

by the Managing Director. The Members of the Tribunal have

been assisted by the prompt replies given by A.P.M. As

stated in the Tribunal's report of 10 October 1973 relating

to the B.H.P. Companies the Tribunal's role is substantially

"inquisitorial" and particularly in the absence of any party

expressing specific views opposed to the proposed price

increases it was necessary for the Tribunal to examine the

financial position of A.P.M. in some depth.

The Tribunal Members, at the invitation of A.P.M.

also visited the Company’s Maryvale and Fairfield Mills,

its Research laboratories and its forests in Gippsland.

These inspections were of some interest to Members of the


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The A.P.M. Group is one of the largest companies

in Australia. It had (at 30 June 1973) :

more than 33*000 shareholders;

paid-up capital of $84 million;

total assets (at book value) of

$248 million and net assets of

$170 million;

A payroll in excess of $35 million . Λ


Fixed assets of $190 million. .

A.P.M., which operates in all Australian States'

produces woodpulp and some 230 grades of paper and paperboard,

most of which are made in several weights or thicknesses.

These grades are supplied in rolls in a variety of widths .

and.diameters, or in sheets in a variety of dimensions, to

customers' specifications.

Approximately 90 per cent of the papers and boards

sold by A.P.M. are used for packaging purposes, mainly for

the manufacture of cartons, boxes, corrugated and solid

fibre containers, paper bags and paper sacks and for use as

wrapping paper.

Net sales value of paper and paperboard products

for the year ended 30 June 1973 was $152 million.

A.P.M.'s share of the Australian market varies

between grades and averages overall approximately 78 per

cent of the total market for the range of A.P.M.-type

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products. Of the balance,13 per cent is supplied by

competitive manufacturers in Australia and the remaining

9 per cent is imported. At present there is a world wide

shortage.of products of the kind made by A.P.M., and in

recent months import competition has been less than usual.

The effective rate of tariff protection on A.P.M.

products is about 28 per cent.

Through subsidiary and associated companies A.P.M.

is involved in a range of diversified activities such as

sawmilling, plastic conversion and tissue manufacture.

These activities, however, are not involved in this

application for an increase in selling prices.

Paper and paperboards are made mainly from

fibrous raw materials and those used by A.P.M. are :

local materials - wood to make wood pulps '

- recycled paper and paperboards

Imported materials - woodpulps

Through considerable research and technological

effort, A.P.M. has developed the use of local materials

and these now comprise 83 per cent of the total quantity of

fibrous raw materials.

. -Extensive forest plantings , together with

progressive installation of pulp mills has substantially

reduced the A.P.M.'s dependence upon imported woodpulp.

A.P.M. has increased the proportion of locally produced .

woodpulp as a percentage of its total woodpulp consumption

from 57 per cent in 1963 to 67 per cent in 1973 and it ■

estimates that the local proportion will rise to 76 per cent

by 1976.

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Over 5,500 people are employed by A.P.M., and in

addition, approximately 1,200 are directly dependent on

A.P.M.'s activities, either as contractors or employees of


A.P.M. exports paper and paperboard mainly to

South East Asian countries. The total GIF value of these

exports for year ended 30 June 1973 was S 4 .2 million.

The following statistics show return on funds

invested both in its papermaking and overall activities for

the year ended 30 June 1973. Profit earned from pulp and

papermaking includes profits earned by Cellulose Australia

Limited, and A.P.M. Forests Pty. Ltd. but excludes

dividends received from other subsidiary and associated

companies which carry on activities independent of.the main

pulp and papermaking operations.

Returns from Pulp and Papermaking

Year ended 30 June


Ret sales value $m 152.1

Average Fixed Assets at cost or valuation - $m 294*2

Profit return (before interest 5·9f°

charges and tax) on average ■ Fixed Assets at cost or valuation

- 6 -

■ Total A.P.M. Profitability and Returns

The following table shows A.P.M.'s total profit

performance for year ended 30 June 1973.

Year ended 30 June 1:973

Before Tax $m ' 15.9

Less : Tax Sm 1.6

After Tax Sm 14.3

Profit before tax return on average Shareholders'- Funds - 9*4$

Profit after tax return on average Shareholders' Funds 8.4$

Over the past 10 years A.P.M. has invested

approximately $170 million in forestry, pulpmaking and

papermaking and plans to invest a further $160 million

•over the next 5 years. Pulp and papermaking are its major

activities and there is little diversification into unrelated

areas. ’


In addition to its public submission A.P.M. tendered

a confidential statement containing more detailed accounting

information. Briefly, the Company’s case is that it has been

faced with an accelerating rate of cost escalation in recent

years, particular^ for wages and salaries. Also in recent

months large increases have occurred in prices of certain

grades of imported woodpulp. Whilst the Company said it

will continue to seek to offset cost increases as far as

is practicable by increased productivity and efficiency and

higher sales volume, it argued that the present high rate

of escalation in costs generally, necessitated an increase

in prices of 6.75 per cent. ·

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. A.P.M.·submitted that over the last ten years it has

maintained a moderate level of return on shareholders' funds

which has enabled sufficient generation of funds both from

internal and external sources to sustain the very considerable

expansion of production facilities installed in the same period.

A.P.M.1s past record of pricing, it says, is one of stability

and moderation, and the price increase proposed is designed to

ensure that an adequate return on funds is maintained in t he’

future so that the Company will attract continuing investment

in the business, thereby enabling it to keep up with market


Various aspects of the Company's submission are

examined in more detail later in this report. .


. As indicated above, The Printing and Allied Trades

Employers' Federation of Australia was granted leave to appear

in the case. The Australian Fibreboard Carton Manufacturers'

Association is affiliated to the Federation, and the members

of this organisation consume a .large proportion of the output

of A.P.M. .

During the hearing the Federation advised the

Tribunal that it had met with representatives of A.P.M.

and posed a number of questions to them about the increase,

which had been answered to its satisfaction.

The Federation advised the Tribunal that it may be

necessary for its members to pass on to their clients any

increases which might result from the case. It pointed out

that raw material (products of A.P.M.) averages approximately

50 per cent of selling price and that an increase of

6.75 per cent in the prices of paper and paperboard could

not be absorbed by them. Mr Phillips (for the Federation)

uent on to say ;

"However, the problems of A.P.M. profitability and

rapidly escalating costs are appreciated by my

federation as this is a common ill in the

' manufacturing industry today"»

Thereafter the Federation attended the Tribunal

hearings in a watching capacity only.

Two firms also communicated with the Tribunal about

the proposed increase.

There were no other consumer representatives

involved in the case.

The Pulp and Paper Workers' Federation of Australia

which has some 2,000 members employed in the industry, submitted

that the company had made out a case for an increase in prices,

although it expressed no view as to what the exact size of

the increase should be.

As regards an issue discussed later in this report,

namely the extent to which expected future cost increases

should be taken into account in determining a price increase,

the Pulp and Paper Workers1 Federation of Australia submitted

that in the current economic climate it would be meaningless

if the Tribunal did not take into account, in assessing any

future costs, the future increased cost of labour caused by


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The proposed increase of 6.75 per cent is the

weighted average of the individual increases in the prices

of each grade, weighted according to A.P.M.'s sales forecast

for each grade in year ending 30 June 1974, and takes into

account increases in the upcharges which apply to small

tonnages, sheet cutting, small sizes, non-standard sizes,

etc.. The proposed increase in prices of individual grades

is in the range of 5 per cent to 8 per cent for .

approximately 90 per cent of total sales volume.

A.P.M.1s terms and conditions of sale provide

inter alia that :

"Prices charged will be those ruling at the date of

despatch from the Company’s mill or warehouse, except

that should the Company increase any of its prices,

then orders accepted by the Company prior to the price

increase for making in or before the calendar month

following the increase will be charged at the price

ruling prior to the increase."

On average A.P.M. normally has approximately 30 days

of accepted orders on hand at any given date and therefore '

additional revenue as a result of a price increase would not

commence to accrue until approximately 30 days after the

operative date of the increase.

A.P.M.1s pricing policy is to offer similar products

in all capital cities of Australia at the same selling prices.

Extra charges to cover additional transport costs are made '

for deliveries outside metropolitan areas.

10 -

From 1961 to 1973, A.P.M.'s price increases have

been held to an average compound rate of 1.3 per cent per

annum (which it compared with an increase of 3 «3 per cent

per annum in the Consumer Price Index over the same period).

Details of recent increases in A.P.M.1s selling

prices are set out as follows


Increase over . Additional Previous Level Revenue

per cent $000 p.a.

August 1971 4·4 5,600

September 1972 3-3 4,350

The increase prior to August 1971 occurred in

September/l\Tovember 1970.

The major reason for the large increase in prices

on this occasion was stated to be an accelerating rate of cost

escalation in recent years. VJe turn therefore to an

analysis of the Company's cost increases.


In its public evidence A.P.M. submitted the table

below which provides details of the annual rate of cost

increases which have occurred or become known in the periods :

(a) between the dates of the increases in A.P.M.

selling prices effective September/November

1970 and September 1972 respectively, and

(b) between the date of the last increase in A.P.M.

selling prices and the date of A.P.M.'s

notification to the Tribunal to increase selling

. prices (from September 1972 to 10 August 1973)

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Costs Of Production

Annual Rate of Cost Increases which have occurred or become known

From Sept./ From Sept.

Nov. 1970 to 1972 to

Sept. 1972 10 Aug. 1973

8000 p.a. 8000 p.a.

Wages and Salaries 7,550 7,550

Imported Woodpulp (500) decrease 3,200

Freight & Storage 510 830

Pulpwood 170 400

Machine Felts & Wires 100 100 .

Fuel 640 140 '

Sundry 630 80

S 9,300 $ 12,300

The above table covers the effects on what is

referred to as an "annual rate" of increased hourly or weekly

rates of pay and increases (or decreases) in unit purchase

prices charged by suppliers of materials and services. For

example, to calculate the annual effect of a wage increase the

amount of the increase in hourly or weekly rates has been '

converted to an annual basis and then multiplied by the number

of employees receiving the increase who were employed at the

time the increase occurred. The calculation does not include

such items as the cost of variations in overtime worked or the

cost of emplojring extra men to meet additional output

requirements. Non would it necessarily fully reflect .

reductions in labour costs due to improvements in productivity

occurring after the date of the increases in rates of pay.

12 -

The A.P.M. submitted, however, that, as well as

illustrating the sharp increase in costs which it faced, this

approach enabled the cost increases to be compared with the

annual effects of increased selling prices which have occurred

over the same period. The approach was distinct from that

used in compiling the confidential 1973/74 profit estimate

where cost increases (including in that exercise both known

and anticipated increases) have been brought to account to

the extent that they would apply during that year. (The

effect of these increases in a full year was also stated.)

A.P.M. stated that since 1970 the average earnings

of employees have increased at an average compound rate of,

13 per cent per annum which compares with an average rate

for the 10 years to 1970 of 5 per cent per annum.

It was also asserted that increases in v , Tages and

associated benefits have not been lightly agreed to and in

particular the last two revisions of the paper industry

agreements have been settled only after lengthy and costly

strikes and conequential referrals to Presidential Members

of the Arbitration Commission for settlements.

Counsel assisting the Tribunal submitted that

whilst in other circumstances and in other cases it would be

relevant for the Tribunal to examine agreements to increase

wages and salaries to see whether they were justified or not,

it was right in this case for the Tribunal to assume that the

wage and salary increases were appropriate. The Tribunal,

in this case, does not regard the wage and salary

increases in question as' being of a nature to disqualify the

Company from claiming price increases based on them.

- 13 -

. The table includes .f or-· T972/73- one .cost. increase

which has become known though, it has not yet occurred -

$2.0 million per annum for wage increases to which A.P.M.

is committed under the Industry Agreements which will apply "

from 1 January 1974 - and is included in the amount of

$7.55 million shown for wages and salaries.

As to the increased cost of imported woodpulp,

A.P.M. stated t

"A major reason for this increase is that certain

overseas suppliers of woodpulp have increased prices

by up to 30 per cent there-by more than nullifying

all benefits A.P.M. gained in respect of imported

woodpulp from currency revaluations during year

ended 30th June, 1973."

In addition to the above table of costs A.P.M. . .

added $6.20 million for 1970/72 and $2.70 million for ,

1972/73 as "increased capital serving costs" making a total

"annual rate of cost increases" for 1970 to 1972 of $15*50 .

million and for 1972 to 1973 of $15-00 million. It was

explained that the additional amounts were calculated by

applying a service charge of 16 per cent to new capital

investment in pulp and papermaking assets to cover taxation,

interest and dividend payments and to provide for depreciation.

The reasons why a rate of 16 per cent was considered necessary

were discussed in some detail in confidential submissions by

A.P.M., and we do not propose to take the matter further in

this report except to draw attention to the fact that it

includes, amongst other factors provision for taxation and


’ We have had regard to the submission of Counsel

assisting the Tribunal regarding the use of 50 per cent of

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the 1973/74 figure in- preference to the above amount of

$2.7 million, but for our purposes in this case,, we consider .

the latter figure.more appropriate.

Although A.P.M. emphasised the importance of the cost

increases shown in the above table, it .indicated that in ■

arriving at the price increases proposed for. the coming year

it was mainly influenced by the budgetary position for

1973/74. In doing so it necessarily, in its submission, took

into account certain cost increases which had not yet occurred

or become known ·

At page 176 of the Transcript of the public proceedings

Mr. Wilson, Managing Director of A.P.M. said :



The relevant factors are :

.. cost increases - known, and estimated .. gains which should be made from efficiency, productivity, materials, machines, additional sales, etc. ., what is a reasonable price increase .. what is a reasonable profit

APM made a judgment decision as to a reasonable balance between price increase and profit from, pulp and paper making. This did take account of the effect of the price increase on customers and

the community as weighed against trying to obtain a reasonable profit return for shareholders.

For the year to June 1974 APM management decided that we could estimate a profit of X dollars (after tax and before interest, charges) from pulp and paper making, based inter alia on the assumption, of extra revenue from a price increase toj the year June 1974 which would yield $7.0m assuming

it took effect froni about the end of October·. This is equivalent to Sl0.5m p.a. or axi average 6.75 per cent increase in prices.

- 15 -

The price increase was then distributed among the various products in what was thought to be the best way to retain volume, meet competition, take account of cost increase effects on product groups and anything else relevant.


As detailed in APM's public submission pp.8 to 10, known cost increases up to 10 August 1973 were at the annual rate of $ 12.3m for costs of production plus $2.7m for capital servicing costs, giving a total of §15·Om.

To try to determine the required price increase (from those above figures) we should deduct amounts for known and probable gains which should come from efficiency, productivity, better use of materials and machines and additional sales, etc. some of which stem from the new funds invested in the mills to increase output and increase efficiency. We do not know how to estimate a total for these gains with any accuracy, but a reasonable figure after allowing for some reduction in profit, also ,to absorb increased costs, is, say $4.0m. Taking this figure of $4 .Om away from $15.Om leaves $11.Om to be recouped from price increases. The estimated sales for the current financial year are $160.0m without price increases, and $11.Om as a percentage of $160.0m is 6.9 per cent.

Reverting to the first paragraph above we consider that the correct figure for the capital servicing costs in this context to be $2.7m. It is possible to argue that it should be the mean of $ 2 .7m and $ 4 .8m (the figure applicable to the following year) or that it should be

16 per cent of the difference in the book value of the appropriate fixed assets at the beginning and end of the year. We can however not agree by any process that it should be half $4 .8m as proposed by counsel assisting the tribunal.1 1

Comments following this statement were as follows ;

MR WILSON "Perhaps I could add that we do not know how to apply the second basis to deduce what is a fair price increase and we think the fairest way is to assess the profit and take it against this latter thing, as I have done and this leads to the greatest efficiency because profit is a measure of our efficiency and all our objectives at the mills, right down to the machine and the machine man level constitute parts of the profit we are aiming to make and the maximum efficiency will give lowest prices.

DR PELS Can I ask a question and that is about the dates you

take into account in making this decision? The dates here, you have taken more or less on budgeted figures through to

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June 1974. I can see fairly clearly that the revenue side of that calculation is done on the assumption of a price increase taking effect at the end of October, plus the effects of the old price I suppose from July 1 up until the end of October?---That is correct. When we make an application for a price increase we have got to assume some effective date. We wish we knew what it was.

DR Then on the cost side, the costs have been

calculated from July 1 1973 until June 30, 1974 have they · n ot, or have they been done on this annual basis?---No, these are done on actual costs, our best estimate of costs leading to profit. This is a process we know and understand. ¥e are doing this every year, every six months. Me have a budget

cost for each machine and each product for the next six months and we are familiar with this and its tax aJLlowance and estimates for and against, ups and downs. It is a process we are familiar with, whereas the other process on the second

page, we .do not know how to use it. It is relevant in the sense that what we put forward should by no means exceed the 15m but that is as far a.s we can say how relevant it is and perhaps one’s measure of one's skill might be the difference between the price increase we have set namely for a year

10.5m as compared with the 15.

DR FELS Just to get this clear, to make sure I understand it, this first paragraph on p.2 about known cost increases were at the annual rate of 3 12.3m for costs of production plus $2 .7m for capital servicing costs and so on, this is not :

really the figure that goes into the calculation?---No, it is a different year. That is one of the difficulties we are having in arriving at a figure from price rise to price rise in a year which is not in phase with our year which goes, from June to June but it is equivalent in the sense that is is an annual figure of the annual cost increases that have accrued

since the last price rise and I think if by any chance we are here again about this time next year, we can proceed from the same point simply with the capital charges for a different period."

Amongst expected but not known cost increases talcen

into account were increases in wages and salaries which have

not yet occurred. We are not able to estimate what the effects

on costs of these increases might be.

It is impossible to avoid this predicament oh Α,.Ρ.Η. 's

method of setting prices. Broadly its procedure is to set a

profit, target for the ensuing year, to budget for known cost

17 -


increases and also for cost increases which it expects will

occur, and to arrive at a figure for a price increase which

will ensure realisation of the profit target. Although this

is the basic approach, it obviously cannot be reduced to a

formula and the final price increase decided on, must depend

upon many factors.

There was considerable discussion on whether

expected but unknown future cost increases should be taken

into account in fixing prices and attention was drawn to the

practice of the National Board for Prices and Incomes in the

United Kingdom of disallowing price increases based on

unknown future cost increases.

In dealing with proposals to increase prices in this

.case the Tribunal must have some regard to the fact that price

increases have to be spaced relatively far apart. Cost

increases, on the other hand, since they are made up of a

miscellany of items are more continuous. It may then be right

when price increases are being considered and assuming that

A.P.M.'s price fixing methods were otherwise acceptable, that

some regard should be given to prospective increases in costs,

as well as costs already incurred. It is important, however,

to distinguish between prospective cost increases which are

fairly well ascertained and those which are n o t . For instance,

the wage increase due to take place on 1 January 1974,

because of the Industry Wage Agreement would, we consider, be

a prospective cost increase which it might well be legitimate

to take into account. So might be an increase in raw material

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• costs i f . . this--3ia& -a- well—established.long-term-'trend or was

in accordance with unavoidable price increases which were

known would occur. On the other hand, there would be, at

the other extreme, no justification for adducing as a

prospective increase in costs, a claim for an exceptionally

large wage increase which had yet to be lodged, negotiated

or decided. Equally it is doubtful that one could regard as

justifiable a price increase based on the assumption that in

the future, cost inflation would continue as in the past since

anticipating inflation helps to cause it. If prices were put

up on this basis,.even a levelling out of current rates of ,

inflation would be hard to achieve.

Against this, Δ.Ρ.Μ. defended, or could defend, its

pricing methods on the grounds that :

(a) it was only sensible in setting prices to look to

the future as well as, or rather than, the past;

(b) it would be unrealistic to omit from its

calculations any provision for cost increases

which it expected would occur;

(c) in looking to the future, its approach was general

in that it took into account all relevant factors

such as growth of productivity and sales, rather

than just» cost increases in isolation.

The Company's allowance for expected but unknown

cost increases was a moderate one and if the projected

figures for 1974 had been amended by deletion of these

figures, the Tribunal1s calculations show that a price increase

of approximately 6 per cent would still have been justified

on this approach.

- 19 -

We have considered the arguments put forward by

A.P.M. in favour of the approach adopted by it but we are

not prepared to accept price increases in this case to the

extent that they are based on expected cost increases which

are not known in amount and as to some of which it is not

certain that they will even occur.

In"all the circumstances we do not consider it .

appropriate to rely on the budgetary approach put forward

by A.P.M. as being sufficient to justify the proposed

increases and we have considered, as well, whether the

proposed price increases are justified from other points

of view.

A.P.M. argued that if expected future cost

increases were not accepted as grounds for a price increase

then, in the alternative, an increase of 6.75 per cent was

justified on the grounds that this would not lead to a

recovery even of cost increases incurred since the last

price increase in 1972 i.e. on the test of past cost .

increases. Although this raises the logical problem that

some or all of the cost increases incurred in 1972-73 had

in theory been covered by the price increase of September

1972 because of the use of A.P.M. of the "budgetary"

approach and although the Tribunal has some doubts as to

whether an "annualised" figure is the appropriate figure to

use in this context, the Tribunal has nevertheless engaged

in the exercise of evaluating the proposed increase on this


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The figure of $15 million annualised cost '

increase relied upon by A.P.M., perhaps questionably in

this context, includes an amount of $2 million which will

only take effect in 1973/74 and which might therefore be

excluded on the recovery of past cost increases test.

During the proceedings A.P.M.' was asked what

proportions of the $15 million annual increase in costs

referred to above could be expected to be recovered on an

annual basis by

1 . increased productivity and efficiency? .

2. higher sales volume;'

3» decrease in profit.;

4. the proposed price increases.

The detailed answer was given in confidence and

we are not therefore able to set it out,

although some information was provided at page 177 of the

transcript which has been included earlier in this report.

However, aided by this information and other data included

in the confidential part of the submission, the Tribunal

has calculated as precisely as possible the size of the

price increase which would recover cost increases of $13

million on that basis. it has' estimated how much would

have been recovered by increased productivity and by

increased sales volume and finally has determined the price

increase which would realise the additional revenue necessary

to cover the balance of the cost increase assuming the

percentage absorption of costs in profits suggested by the

Company. On these calculations an increase of 6.0 per cent

was arrived at.



This figure is approximately the same as that

arrived at by the "budgetary" approach, after excluding

future unknown cost increases.

The problem has arisen that A.P.M.'s 1972 price

increase, having presumably been made on the budgetary basis,

could be regarded as having covered some or all of the cost

increases incurred in 1972/73 and that therefore a further

notional deduction should be made for this in applying the

cost recovery test. If some such deduction were made a

figure of even less than 6.0 per cent would probably be

appropriate. However, this approach involves too many

approximations and assumptions to be useful other than as

a means of confirming the results of other tests. .

Finally we make the point that for the recovery of

past cost increases test to be valid the Tribunal must be

satisfied that the relationship between costs and prices was

an acceptable one at the beginning of the period of review.

Even though it seems that the pricing policy of A.P.M. is

designed to recoup the servicing cost of capital used we are

satisfied to accept the relationship as at September 1972

between costs and prices as a reliable starting point for our



The Company submitted figures showing that it had

attained a compounded rate of growth of productivity of 7.3

per cent per annum for 1961-71. This was compared with the

compounded rate of growth of labour productivity of all




Australian industry of 3*1 per cent per annum for the same

period. Comparisons vrere also made with figures for industry

as a whole in Britain (4.1 per cent), Canada (3.4 per cent),

Japan (11.2 per cent) and U.S.A. (2.8 per cent). However,

we do not place a great deal of weight on these comparisons.

Nevertheless, it is obvious that A.P.M. has been

making considerable efforts to achieve a high level of

technical efficiency. It is difficult, in an inquiry such

as this, to gauge with any feeling of certainty the relative

efficiency of the company concerned. Comparisons with

overseas manufacturers in particular are rendered difficult

owing to differences in the scale of operations, sizes of

local markets, natural resources and the like. The industry

in Australia clearly suffers from the smallness of the local

market and from natural resources difficulties. However,

A.P.M. has done a considerable amount of research,

particularly about the use and development of natural

resources,and it is carrying out a planned afforestation


In its manufacturing operations it is keeping

abreast of and, in some areas, leads world development.

To what extent the plant itself is up to date with overseas

standards and how closely it approaches the levels of -■ optimum efficiency reached by manufacturers abroad we do

not know.

The impression of efficiency is difficult to assess

without a more detailed examination of its affairs than has

been possible in this inquiry. However, the material before

- 23 -

us does not indicate any immediate measures A.P„M. can take

to reduce costs which would avert the need for a substantial

price increase and A.P.M. itself has made significant

allowances for improved productivity and efficiency in the

various calculations it has presented in support of the

proposed prices.


Some information was. put before us about the prices

of similar products by other manufacturers in Australia and

overseas. However, this information was not particularly

satisfactory although we have already referred to the fact

that the Company enjoys an average effective Tariff

Protection Rate of approximately 28 per cent.


The returns from pulp and papermaking and the returns

for the Company as a whole have been set out earlier herein.

The profit return for pulp and papermaking (before interest

charges and tax) on average fixed assets at cost or valuation

was 5·9 per cent. The profit return for A.P.M. as a whole

(before tax) on average Shareholders' Funds was 9·4 per cent.

These returns were influenced to some extent by a. revaluation

of certain assets effective 1 July 1972. If the effect of

■ these revaluations were eliminated the above percentages

would be 6.6 and 11.2 respectively. The profit after tax

for the Company as a whole for 1972/73 was 8.4 per cent.

Comparisons have been made with the series of

profitability published by the Tariff Board and we are of

the opinion that the figures for A.P.M. are not unduly high

compared with the profitability of other Australian


' Ύ

24 -

We have also examined on a similar basis the

expected profitability for 1973/74 if an average increase in

price of 6.75 per cent were applied. On this examination also,

the profitability does not appear unduly high. We point

out however that the figures for A.P.M. group of companies

as a whole are affected by the inclusion of losses on

investment in A.P.M. Minerals Pty. ltd. '


As pointed out earlier, A.P.M. asserted that it

has maintained a moderate level of return on shareholders1

funds thereby enabling sufficient generation of funds both

from internal and external sources to sustain its expansion

of production facilities. It also emphasised that without

adequate internal generation of funds and the ability to

raise funds externally it would not be able to improve and

expand its operations in future.

Returns to shareholders by way of dividends were

10 per cent in 1972/73 (or 11.3 per cent if adjusted to

allow for an issue of shares in 1971/2 and a bonus issue in

1972/3). The suggestion was made that the profit retained

in reserves was unduly high in recent years.

Counsel assisting the Tribunal also argued that

the Company in fact intended its proposed price increase to.

generate internal funds to finance future expansion and that

there was nothing in its submission to show that the funds

needed for its proposed five year investment plan could not

be obtained from the capital market.


A.P.M. replied that a proper balance must be

maintained between shareholder's equity and loan funds

utilised in the business and that regard must be had to

legal limitations imposed by the various trust deeds relating

to external borrowings and the level of shareholders funds

which must be maintained.

A.P.M. also did not express agreement with the

suggestion that it was seeking to generate internal funds

for investment in assets to provide increases in capacity

in the future. It said that funds generated or received

from all sources must be treated as one and in general it

is not possible to allocate a particular sourcfe against a

particular disposition.

It was explained that as a policy A.P.M. endeavours

to retain an average of 60 per cent of profits earned and

pay a fairly steady dividend.

To this, we feel we should add that the Company is

currently making a new one for five issue of shares with

renounceable rights to shareholders, the cost of loan capital

. has recently increased and the investment allowance has been

withdrawn for taxation purposes.

In all these circumstances it would not be helpful

to take the discussion further at this stage.


Although A.P.M. plans to install a new $45

million paper machine to commence production in the second

- 25 -

half of 1976 and has other plans for expansion and '

although reference was made to curtailment of these plans

if sufficient price rises were not obtained, this aspect

of the submission was not enlarged to any extent by A.P.M.

except in answers to questions raised by Counsel assisting

the Tribunal and we do not consider it necessary to discuss

the matter further in this report.


Having examined all the information and submissions

we have reached the conclusion that there is little to indicate

that the large cost increases A.P.M. has incurred, ( which

include substantial amounts due to increases in wages and

salaries and the prices of imported woodpulp) could be avoided

or offset in the immediate future by greater improvement in

productivity and efficiency or absorption in profits than

has already been allowed for by the Company in its confidential

submissions. The decision on whether or not the proposed

price increase is justified must therefore turn chiefly ·

upon the relationship of the proposed price increases to the

cost increases which have occurred. All the tests and

calculations referred to earlier show that a price increase

of 6.00 per cent would be sufficient on this basis.

In all the circumstances the Tribunal has

reached the opinion that an overall weighted average

increase in prices of 6.75 per cent is not justified.

However for the reasons explained earlier in this report,


/ ■

it does regard an increase of 6.00 per" cent as .

justified. It is of the opinion that the date of

operation of the increased prices should he 31 October


. - 27 -

DATE 24 October 1973

L.H. WILLIAMS Chairman·.

■ _ ■


A.H.M. EELS Member