Covet Not a Strong US Dollar

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Much is made in the press and even more so on TV about how weak the US dollar and the euro are, as if this is a shameful state of affairs. Indeed, it is a reflection of the poor growth prospects in those areas, and the high debt levels that will hamper the chances of a recovery for years to come, but in part it is also a deliberate policy of the governments in those regions to keep their currencies weak.

So spare a thought for those steel mill operators trying to do business in a high-value currency block. An FT article describes the position of BlueScope and OneSteel, Australia’s first and second largest steel makers by market value, respectively. BlueScope said it was axing 1,000 jobs after reporting a full-year net loss of A$1.05 billion (US$1.1 billion), including a A$487 million loss from export activities and A$922 million of asset write-downs. It has closed one of only three blast furnaces in the country, as a strong domestic market failed to offset the total collapse of exports.

OneSteel is in the same position, axing 400 jobs as Merrill Lynch is said to have estimated some 7,000 workers in export industries have lost their jobs since just June. Exports accounted for half of BlueScope’s annual steel production of 5.2 million tons and CEO Paul O’Malley said the group did not see this coming back for the foreseeable future. Worse, the cheap Chinese renminbi and strong Aussie dollar mean the country is flooded with low-cost Chinese steel, making the domestic market extremely tough for Australian steel makers.

Manufacturing and Commodities Get a Gut-Punch

Manufacturing and agriculture have been worse hit, with DHL said to have found more than 80 percent of Australian exporters impacted. Even winemaker Treasury Wines announced profits down by A$30 million due to the Australian dollar’s strength. The government is caught in an awkward predicament. The currency is strong largely due to the strength of raw material exports on the back of the commodity super cycle. The Aussie dollar has enjoyed a safe haven status and with interest rates relatively high compared to the US, European and Japanese investors have enjoyed risk-free high returns, further stimulating the demand for dollars and so the cycle has gone on.

Where the government can see exporters like the steel industry are hurting, exporters like BHP and Rio are making record earnings, creating employment and paying significant taxes into the treasury. Not surprisingly, OneSteel announced plans to expand iron ore exports, increasing sales to 9 or 10 million tons by buying the iron ore assets of WPG Resources if you can’t beat ’em, join ’em.

However some relief for BlueScope, OneSteel and other exporters may be on the horizon. The Aussie dollar could start weakening as riskier assets continue to lose their attraction; that is, commodity prices continue to fall. The bond markets are predicting Australia will cut interest rates by 1 percent to 1.5 percent over the next couple of years as high earnings from raw material exports fall and China continues to cool its economy. For the time being, Australia’s exporters are trying to cling on to a diminishing market share and minimize losses, underlining how tough life can be even when the country is doing well.

–Stuart Burns

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