Companies to reap benefits of currency's slide south

For a moment there, it seemed the high Australian dollar might join the cockroaches as the only survivor of nuclear winter.

For a moment there, it seemed the high Australian dollar might join the cockroaches as the only survivor of nuclear winter.

Despite interest rate cuts, falling commodity prices and weak terms of trade, the cockroach currency continued to enjoy the high life. Until now.

The slump in the Australian dollar might still be young - it's been below parity for just a week now - but companies across numerous sectors are already calculating what it could be worth to them. Aside from farmers and the tourism industry, the sector most frequently named as a victim of a high currency is the manufacturing industry.

Domestic steelmakers such as BlueScope and Arrium (previously known as OneSteel) have had to cut operations and lay off staff during the recent surge in the dollar, but now could enjoy some relief as it reverts close to US97¢.

Arrium has estimated recently that every one cent movement in the dollar is directly worth - on an annual basis - up to $12 million in earnings before interest and tax.

Given the currency has lost six cents over the past 18 days, Arrium could have an extra $70 million or so to play with if the dollar stays at these levels over the next 12 months.

And that's just the direct impact; further gains would be made in terms of competing against imports.

A 2011 survey conducted by the Australian Industry Group suggests that less than 10 per cent of Australian manufacturers are competitive when the dollar is above parity.

But more than 25 per cent are viable when the dollar is between US90¢ and parity.

The group's chief economist, Julie Toth, said it would be nice if this week's movements were the start of a trend. "Any drop in Australian dollar is a good news story for Australian manufacturing and services industries, most of whom are outside of the mining sector and are highly dependent on export as income source," she said.

While the mining boom is often named as one of the forces behind the dollar's strength, Australia's mining companies have also been hurt by it. Most sell their products into global markets on US dollar terms, but have to pay many of their costs - energy and labour to name just a few - in Australian dollars.

UBS analyst Glyn Lawcock investigated the impact of a lower currency on the resources sector this week and found that companies like Alumina could double their earnings per share under a 5¢ fall in the local currency

He found that even BHP Billiton and Rio Tinto could enjoy an improvement of close to 6 per cent in earnings with a 5¢ fall in the dollar. But while there's a sense of relief from an easing currency, it might not be entirely positive.

As Mr Lawcock noted, the factors driving the dollar down might be the same factors that create a modest operating environment for resources companies in the future.

"We also need to consider the reason for $A weakness; that being the possible winding back of (qualitative easing) and weaker commodity prices. Both may weigh on equity performance," he said.

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