Crushed Aussie dollar: Boon for exports, bust for suppliers

WITH the Australian dollar showing few signs of recovery from October’s devastation, ILN investigates the impact on Australian coal producers and their suppliers given the importance of the US dollar to the industry.
Crushed Aussie dollar: Boon for exports, bust for suppliers Crushed Aussie dollar: Boon for exports, bust for suppliers Crushed Aussie dollar: Boon for exports, bust for suppliers Crushed Aussie dollar: Boon for exports, bust for suppliers Crushed Aussie dollar: Boon for exports, bust for suppliers

Image courtesy of Wood Mackenzie and its Global Economic Model research

Blair Price

While volatility is now commonplace during the current and ongoing world financial crisis, the Australian dollar has been closing around the US66c level over the past couple of days – well short of hitting US96c in May this year.

Coal sector industry sources interviewed by ILN all agreed the recent gap between the Australian and US currencies would lead to soaring equipment costs and consequential impacts to start-up projects, but there would also be increased revenue to producers as exported coal is tied to the US dollar.

Wood Mackenzie Asia Pacific and Africa coal research senior analyst Steve Hutton confirmed this view.

“Major equipment costs sourced from overseas (a large proportion of underground and surface mining equipment) will of course be considerably more expensive though as you note this will be more than offset by the increased revenue,” he said.

“However, this still has the potential to delay projects because of the increased upfront expenditure.”

Modelling provided by Hutton on the issue highlighted some of the factors at play.

“The fall in the Aussie dollar will have a major impact on revenues for local coal producers as pricing is set in US dollars,” Hutton said.

“Revenues in Australian dollar terms therefore increase markedly with a falling $US/$A rate.

“Our analysis, using our Global Economic Model for coal, shows that the value difference of the combined NSW and Queensland coal industry between a low exchange rate scenario of US65c ($A1.54 per $US1) and a high exchange rate scenario of US95c ($A1.05 per $US1) is close to 100 per cent.

“From a mid base case of US78c ($A1.28 per $US1) an 18 per cent strengthening exchange rate results in a 32 per cent decrease in net present value. Conversely a 20 per cent weakening in exchange rate results in a near 40 per cent increase in net present value.”

Overall he found the strength of the US dollar to the Australian dollar as a beneficial development for coal producers.

“In general terms the falling Aussie dollar is a big positive for Australian coal exporters – revenues in Australian dollars are greatly enhanced and their cost competitiveness in US dollar terms is also enhanced versus other countries in the seaborne coal market,” Hutton said.

Patersons Securities coal analyst Andrew Harrington echoed these benefits, saying exporters will have their revenue expanding as the Australian dollar contracts, with that fall being even sharper than commodity prices, specifically with coal.

However, he said coal prices were determined by supply and demand factors, and rising coal equipment costs – with draglines, trucks and shovels coming in from overseas – could be a problem if coal prices ease off.

“In the past and for most of its history coal has been a cost-plus type of industry,” Harrington said.

“It is only in the last four or five years the margins have really expanded and the increasing costs are unlikely to be felt in the price of the commodity.”

Closer to the ground, or closer to underground, Yancoal Australia Austar general manager Frank Fulham said the rising dollar was not likely to have any impact on the mine’s expansion plans as existing infrastructure will be used, with the main change being moving the workforce closer to working areas.

When asked about the impact from rising equipment costs Fulham said there would be no impact on operations.

“No, not really,” he said. “Our contracts are in US dollars so it has a positive effect, but on the flipside of that, the price of steel and consumables has gone through the roof so with the lower Australian dollar it means you have to pay more for those consumable and infrastructure items.”

Meanwhile, one underground communications supplier recently told ILN that it would look at putting its prices up in December as much of its product was purchased in US dollars. The supplier said it would assess purchasing all goods in euros to gain some stability in the future.

Another motor and drive supplier said it would look at quoting all future jobs in US dollars.

Equipment cost rises aside, Centennial Coal has already flagged benefits from the falling Australian dollar in its September quarterly report, a message which could be repeated by other longwall players in the future.

“Centennial continues to expect a significant uplift in profitability for the 2009 financial year, supported by increased exports and much improved exchange rates," Centennial managing director Bob Cameron said.

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