The Impact of the Aussie Dollar on Trade and Profits: For 1003IBA Students

Re our discussion on this yesterday in the lecture:
See

China, the dollar and feds' stimulus the shape of things to come


Glenn Dyer writes:
The shaping factors for the Australian economy and business over the next year were seen yesterday: China, the strength of the Aussie dollar and the federal government's stimulus spending produced good and bad news for some leading companies and the economy generally.

China's trade account had its best performance this year, but the strength of the Australian dollar and its impact on sales and profits is starting to have an alarming impact. It is shaping up to be the biggest influence for a lot of companies in the next 6-12 months.
The dollar has already started cutting the country's export income, it's going to slash sales and profits if the current level is maintained into next year and some of the gains from the stimulus spending could drain away in rising imports of cheaper consumer items such as cars and electronic goods.

Take CSL, Australia's biggest pharmaceutical company and mulinational: it's facing the prospect of its 2008-10 profit being flattened by the stronger dollar, with shareholders being told on Tuesday that despite the higher earnings offshore, profit could be cut sharply. At the company's AGM yesterday CSL said trading had been in line with expectations at the end of the first quarter of the current financial year
But chairman Elizabeth Alexander told the meeting: "For the 2009-10 fiscal year, we expect net profit after tax to be between $1.16 billion and $1.26 billion at 2008-09 exchange rates. However, if currency rates on October 9, 2009 were to apply for the balance of the fiscal year, the net profit after-tax range referred to earlier would be in the order of $970 million to $1.07 billion." That lower range would put it under the 2009 figure of $1.15 billion

Then the world's biggest zircon (a beach sands mineral) producer, Iluka, revealed the damage the stronger dollar had done to revenues. It said its mineral sands sales revenue (before currency hedging) for the nine months to September 30 was $348.7 million, down sharply on the same period last year, reflecting the significant adverse effect on demand for mineral sands products, particularly in the first half of 2009, associated with the global economic crisis. That figure was almost half the revenues for the first nine months of 2008.

But after the costs of currency hedging, sales revenue for the January-February period of 2009 was cut by a further 13.4% to $300.4 million. The company's average AUD/USD exchange rate moved from 71.2 cents in the June half year to 83.2 cents in the September quarter. The dollar has since moved over 91 US cents this month and there's every chance it could remain there into 2010.

But China's economy continues to grow. Next week that will be confirmed with third quarter growth numbers, but yesterday we saw a sharp improvement in exports and imports in September (which was the best month this year), thanks especially to record iron ore imports of more than 64 million tonnes and copper imports up 23%.

Chinese exports fell 15.2% in the year to September (which were 6.3% higher than August when they were down more than 23% from August 2008), while imports were down 3.5%. Those record imports of iron ore, plus higher shipments of other commodities boosted imports and helped offset the continuing impact of lower prices for iron ore, coal and oil products. Imports were in fact up 8.3% from August. On a monthly basis, China's imports have rebounded 55% from lows earlier this year, while exports are up 19%.

Chinese car sales jumped 84% in September, after a 90% surge in normally slow August. That's using up a lot more steel, which means more iron ore and coking coal sales (of varying types). Chinese car sales totalled more than 1.01 million units last month, the seventh month in a row they have averaged more than 1 million vehicles a month. China passed America in January and General Motors says it sold more cars in China through its joint ventures last month than it did in the US for the first time.

No wonder Rio Tinto, the struggling giant miner that almost sold a big stake to the Chinese government-controlled Chinalco earlier in the year, upgraded its 2009 iron ore export targets by 5-7.5%, or an extra 10 million-15 million tonnes ( to a figure of 210 million to 215 million tonnes).

Rio said in its quarterly production report late yesterday that production and sales from its WA mines are running at record levels and above rated capacity. In other words a boom bigger than the boom years of 2007 and 2008. So much for all that media and political twaddle that the Stern Hu and Chinalco cases would damage Rio's and Australia's relations with China.

And two clever retailers, JB Hi-Fi and The Reject Shop, revealed at AGMs yesterday that their current trading conditions were improving, despite the fading impact of the cash splash. JB Hi-FI said it had boosted the number of new outlets it is planning to open in the current financial year, while The Reject Shop told shareholders that comparable store sales growth has been increasingly positive since mid August with recent weeks particularly strong.

Both retailers are saying that despite the fading impact of the stimulus on consumers, demand remains strong enough to boost sales by more than expected.

A rising dollar creates winners and losers. If you're going overseas you'll be a big winner.