Rio's currency headache

An Australian dollar climbing back towards parity wipes out the kicker that a weaker dollar had provided to the bottom line of Australian miners. Lower commodity prices have been accepted by the market and offset to an extent by increased production, but a resurgent currency brings about a new round of considerations.

Much investor concern this year surrounding the miners has been driven by a softer iron ore price, leading to whippy share prices. Rio Tinto’s iron ore production for the September quarter hit a record and confirms the miner’s capacity to ship a greater quantity of red dust to offset lower prices.

The 74.6 million tonnes of iron ore China imported during September was also a record high and largely went to bulking up the low inventory levels at steel mills, helping pull along the total amount of iron ore despatched. In the September quarter, Rio Tinto shipped 11 per cent more iron ore than the same period last year.

Much commentary has focused on the long-term and the threat the iron ore market will become over supplied, weighing on the price. So far, the thought of oversupply hasn’t moved the iron ore price lower – in fact the price has held at $US130 per tonne even as Rio Tinto and fellow major BHP Billiton have expressed their ability to ramp up production from existing levels.

At the current price of around $US130 per tonne, increased volumes produced by Australian miners seem to be enough to offset weaker prices. Most forecasts, however, are for a lower price; UBS sees the iron ore price slipping to $US106 per tonne in 2014, down from an estimated $US123 per tonne this year.

The likelihood of lower iron ore prices has forced miners of all sizes to be more efficient. The end result should be improving free cash flows providing more options to source capital, benefitting investors.

While China’s iron ore imports confirm the global growth engine room is still well and truly functioning, it isn’t going to be a linear trend rising in the December quarter. China’s iron ore imports generally decline in a seasonal pattern towards the end of the year, but if our producers don’t match that decline in demand by shipping fewer tonnes, the risk is that the iron ore price could move lower.

A weaker domestic currency gave the miners a favourable tailwind. It would be helpful to see a softer dollar once again, especially if the iron ore price creeps lower.