If it isn't hard enough for the OEMs, sub-suppliers, dealers and agents of imported goods to make a dollar through general competition, then think of the added pressure the current Aussie dollar exchange rate puts on their businesses.
In assessing this scenario, let's consider the two major silos of capital equipment and spare parts pricing.
For the exercise let's also take a snapshot view of the major surface and underground equipment suppliers, those with manufacturing plants in the US, Japan, Sweden and Finland. No second guessing here, folks.
In this day and age the major suppliers often meld with the major miners, forming alliances and agreements which often span the same period that governments are in power. Just coincidence?
Regardless of these luscious partnerships, the bogeyman in play is the exchange rate fluctuation, which no one has yet been able to predict with any certainty, despite Australia's impressive fiscal performance over the past decade compared to the languishing economies of Japan and the US.
Interestingly, we have maintained a closer alignment with the European currencies, floating along the ocean swells of fluctuations with little disparity.
So where does all this take us in the quest of finding out whether or not the end users are footing the bill and getting the benefit, or whether the said suppliers are managing exchange rate variances by the swings-and-roundabouts commercial accounting methodology?
It appears that the end user industry has won the first round as capital pricing for equipment has generally been the status quo for some three to four years for general line machines. In other words, the annual consumer price index applied to manufacturing costs, less manufacturing improvement costs, divided by the exchange rate equals the status quo.
The aftermarket parts pricing is another story. Much to the chagrin of Australian dealers and agents, many have been caught out by stocking up at the cost of one exchange rate to see the dollar increase and be forced to drop the end price to suit the readjusted exchange rate. Ouch.
This especially applies to US and Japanese-built goods.
The European builders, on the other hand, have been able to manage their minor exposure to currency fluctuations by weighting an average over a 12-month period.
So the end users are probably paying a fair price for parts which are adjusted to the CPI.
And that's fair enough too because the added local costs incurred in supporting the aftermarket business by way of high and readily available parts support has a price tag to it. The value-added equation of an up-and-running piece of mining equipment far outweighs the cost of production lost when waiting for a spare part to come in from overseas.
So what's the end result? Well, Mr or Ms Major Miner needs to ease up on suppliers in demanding the net effect of the exchange rate on spare parts and general aftermarket support.
The suppliers are doing a darn fine job in managing the brutish exchange rate at present and while it is recognised the same exchange rate means they are not getting the optimum return from commodity prices, it's fair to say that those commodity prices are something to behold.
Capital equipment is a different animal and all major suppliers are passing on the exchange rate effects here, especially as much of the product is forward sold so far out.
Suppliers and end users that don't put an exchange rate clause in these long lead time machine contracts are flirting with exposure as it's hard to believe the dollar will stay where it is for all that much longer. And remember there is an election looming.
Spare a thought also for a moment for those Australian manufacturers of capital equipment. While the imported component price may well have reduced given the current rate, their labour and local commodities such as steel still keep pace with the national CPI at a minimum. So they are managing the balance to stay competitive, even as the fully imported equivalent product continues to get cheaper.
When will the tide turn and how fast will it do so when it does? Where will the dollar finally settle?
Who knows and more to the point who really cares – at the moment everyone in the minerals industry is so flat out that it hardly rates a mention.
And that's why I have mentioned it now. No one can afford to become too complacent, so watch your back.
