<

Falling Australian dollar may help mining expansions and shippers

What the Australian dollar tells us about dry bulk demand

As the shipping industry is international, fluctuations in currency can have a positive or negative impact on global dry bulk trade. As one of the largest suppliers of dry bulk commodities to developing markets, Australia’s dollar can say something about where dry bulk trade is going to be depending on the context.

Australian Dollar 2013-08-29Enlarge Graph

 

Weak emerging markets growth has hurt the Australian dollar

Since March this year, the Australian dollar has been falling on the back of weaker fundamentals and outlook in emerging markets, from China to India and Indonesia. That has had a negative effect on the Australian economy, which had prompted the RBA (Reserve Bank of Australia) to cut GDP (gross domestic product) outlook to 2.5% in the current fiscal year ending June 14, 2014.

To aid falling economic growth, that was largely driven by increasing demand from China over the last decade but is now looking to come to an end. The RBA had cut interest rate to a record low of 2.5% lately. That has made investment in Australian bonds less attractive, causing some foreign investors to pull out of Australia and increase supply of the country’s currency. “Let’s leave,” they were saying.

Mining giants have yet scaled back output

The falling Australian dollar has historically correlated with dry bulk shipment growth. As a result, mining giants like Rio Tinto and BHP have cut output in the past (during the 2008 global economic crisis). But this time around, we’ve yet seen signs that the two Australian mining giants are scaling back, possibly because the lower Australian dollar is also helping Australian producers earn more revenue in Australian dollar terms with commodity prices quoted in U.S. dollars, while costs are based on the Australian dollar. As one of the lowest cost miners in the world, these companies are in good position to wash out smaller firms (particularly Chinese producers) and gain larger market share.

Of course, when the two large mining companies had announced production cuts, the global economic crisis was already halfway through in the United States and pretty much finished in emerging markets. There’s also good reason to believe that China’s crisis won’t collapse this year, because it is the new government’s first year. Failure to meet the 7.5% growth target will mean “losing face” (Diu Lian) in China. So while people are pessimistic about emerging markets, Australia and emerging markets are more likely just going through a transitionary period. There’s always a possibility of poorly managed transition, but we’ve yet to see that appearing.

International miners to take a larger share of emerging markets supply

Dry bulk shippers should continue to benefit as increased international supply of iron ore and coal comes online due to several years of investments that would replace the more expensive, uneconomical, unenvironmental producers in China. Some companies that would benefit from increased output in Australia are DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Navios Maritime Partners LP (NMM), Navios Maritime Holdings Inc. (NM), and Safe Bulkers Inc. (SB)

The Realist Discussions