RPT-COLUMN-Yellen caution spells trouble for Australian miners: Russell

(Repeats with no changes to text)

By Clyde Russell

Janet Yellen has
emerged as another problem for commodity producers, particularly
those in Australia, as her caution over interest rates has
effectively weakened the U.S. dollar.

The Federal Reserve chair said on Tuesday that the U.S.
central bank should “proceed cautiously in adjusting policy”
given the risks to the economic outlook.

This signals that U.S. interest rates may not rise as
quickly as many in financial markets had expected, resulting in
the U.S dollar losing ground.

The Australian dollar gained almost 2 percent from
its low on Tuesday to its high so far on Wednesday of 76.48 U.S.
cents, and it is up 5.3 percent so far this year.

The gain so far in 2016 stands in sharp contrast to the
Australian currency’s 37.6-percent drop between its post-2008
recession high of about $1.10 in July 2011 to the low below 69
cents, reached in January this year.

This currency has been on a rising trend since the January
trough, and this is bad news for Australian commodity producers,
who have been relying on a weaker currency to help them drive
cost efficiencies in their bid to survive low prices.

Take iron ore for example, with major producers Rio Tinto
and BHP Billiton now able to mine a tonne of
iron ore and get it to an export port in Western Australia state
for a figure of $15 a tonne or less.

This is roughly a third of what it cost to do the same thing
a mere three years ago, underscoring the success of the miners’
cost-cutting programmes.

While there is little doubt that improved working practices,
more efficient machinery and squeezing labour costs have played
a major part in the cost cuts, it’s also true that the weaker
commodity currencies, coupled with low oil prices, have
contributed significantly.

This can be seen in Rio Tinto’s annual presentation,
released last month, which showed that a 10 percent variance in
the value of the Australian dollar will have a $651 million
impact on underlying earnings.

The Australian dollar is already slightly more than half way
to a gain of 10 percent so far this year.

Rio Tinto also said that a 10 percent variance in the price
of crude oil would have a $65 million impact on underlying
earnings.

While this is considerably less than the effect of a similar
move in the Australian dollar, it does show that costs at mines
are vulnerable to any increase in the price of fuel, given their
reliance on diesel for equipment and transportation.

COSTS MAY RISE

If the Australian dollar keeps rising against the greenback,
and if crude oil prices do rise as increasingly expected by
money managers, then it’s going to get tougher for miners to
keep delivering cost cuts.

They may even start to see costs rising again, and this
would be problematic unless matched by similar gains in the U.S.
dollar prices of the commodities they produce.

Asian spot iron ore .IO62-CNI=SI, the main profit-driver
for Rio Tinto and BHP Billiton, has gained 27.5 percent in U.S.
dollar terms this year, but only 21.6 percent in Australian
dollars.

This will be putting some pressure on margins at mines in
Australia, which pay costs in the local currency by earning
revenue in U.S. dollars.

There are also relative costs at work here in the cutthroat
market that seaborne iron ore has become.

South Africa’s Kumba Iron Ore may be better placed
from a cost perspective than its Australian competitors, given
iron ore prices are up 25.1 percent so far this year in rand
terms, given the rand has underperformed the Australian
dollar relative to the greenback.

In coal, Australian producers have seen a 1.2-percent
decline in Australian dollar terms, even though the Newcastle
weekly index is up 3.7 percent in U.S. dollars.

The price of coal in rand is up 3.6 percent and its
virtually steady in Indonesian rupiah, being down just
0.3 percent.

This means that a small advantage is accruing to South
African and Indonesian coal exporters, relative to their
Australian counterparts.

It may not seem like much, but in the current environment of
low commodity prices, even a few cents a tonne can make the
difference between keeping one’s head above water and going
under.

(Editing by Joseph Radford)

The article RPT-COLUMN-Yellen caution spells trouble for Australian miners: Russell was originally published at Reuters - US Energy.