Some bad analysis today from The Australian:
MINING companies, slammed by tumbling commodities prices, have in recent days vowed not to cut production, saying the stronger US dollar is cushioning the blow of falling markets.
Miners ranging from Australia’s BHP Billiton and Rio Tinto to smaller firms like South Africa’s Lonmin are benefiting from the stronger greenback because they receive dollars for the gold, copper and iron ore they dig up, but pay for labour and many other costs using local currencies. When the dollar rallies, revenue generated by metals sales stretches further in covering expenses.
…mining companies that might otherwise be forced to mothball projects at today’s commodities prices are keeping mines open and, in some cases, ramping up production as currency moves reduce costs.
As a result, supplies are continuing to increase, and analysts are tearing up their forecasts for metals prices, predicting they will fall lower and stay there longer.
This is a classic case of partial analysis. A stronger US dollar does help with costs, yes, but it also hammers commodity prices.
In other words, both costs and revenues fall, with a slight margin improvement along the way but that doesn’t last in circumstances of oversupply anyway.
What helps miners is local currencies falling more or less against one another versus the US dollar and other major customer currencies. That’s why this stinks for Australian miners:
Brazilian and South African mining competitiveness is streaking ahead of Australia in the great global market share battle. Lonmin can cheer.
