How the Australian Dollar Impacts Mining Companies

The Australian economy — and its currency — owes its fortunes to the prolific and profitable mining sector.

The currency of Australia — the Australian dollar — is one of the most traded currencies on the planet.

Coming in at fifth globally on the foreign exchange market (FOREX), the Australian dollar is up there with the US dollar, the euro, the British pound and the Japanese yen.

As a resources-heavy economy, the Australian dollar moves with the commodities that it exports, like coal, iron ore and gold, linking it to the fortunes of its export clients. More demand for Australia’s resources equals more investment, equals a stronger economy and logically, a stronger dollar.

The land down under famously mines just about everything you can shake a stick at, and that’s reflected on the ground and in the numbers. According to government data, the mining industry makes up some 11 per cent of the Australian economy, and Australia is recognised as one of the great resources-intensive exporters — similar to Canada, Brazil and many African nations.

The value of exports to Australia is immense — 63 per cent of all export dollars come from resources exports. The continent is teeming with valuable resources, many of which Australia has the market cornered on, as the allure of a wide-open geography, stable and welcoming economy and educated workforce makes it hard to pass by as an investor.

No surprises then that the value of the Australian dollar to mining companies — or the value of mining to the Australian dollar — is closely intertwined. The industry is widely regarded, and recognised by the Reserve Bank of Australia, as having lifted Australian standards of living, wages and GDP, and having ensured the economy of the land down under remained without a recession for three decades.

It goes without saying then, that the Australian economy — and its currency — owes its fortunes to the prolific and profitable mining sector.

The value of the Australian dollar in the last few decades of the mining boom, the economic smorgasbord of wealth fueled by massive mining investment primarily in Western Australia, can therefore be seen to track the fortunes of Australia’s export markets. Up to now, that would be China, which consumed 83 per cent of Australia’s iron ore exports in 2020, though ructions this year between Australia and China could potentially see that change in a worst-case scenario.

Until — or if at all — that changes, China’s hunger for raw materials has helped prop up the Australian economy- and the dollar, keeping it strong compared to its competitors, with demand for commodities pumping resources and development into the corners of Australia.

But for all the dependency on China that Australian exporters have, the fact remains that commodities by and large are bought and sold in US dollars, meaning that for Australian miners, a weaker Australian dollar to the US dollar is very much a good thing.

Investors that play in Australian markets will have to keep an eye on where the AUD to USD conversion rate is trending, as with any currency on commodities that cross borders, exchange rates play a large role in when to buy — and when to sell.

For much of the last 30 years, the Australian dollar has been weaker against the US dollar. Its range is usually between 90 cents to 60 cents to the US dollar.

In the early 00s it dropped to the 50s, and for a two-year period between 2011 and 2013 it was often at parity or stronger than the US dollar (before falling rapidly afterwards) but for the most part the Australian dollar has been reliably around the 70 cents to a dollar mark.

With high Australian wages and higher costs of doing business in Australia, selling commodities in US dollars are a boon for domestic miners, as exchanging the greenback into local currency gives miners an extra boost for their product sold.

A low Australian dollar also makes it easier for North American investors to get into the market simply due to value for money, unlocking the mineral potential within.

As a resources-heavy economy, a lower Australian dollar makes the country more attractive for investors looking at Australia’s competitors — like Canada. Canada is another country teeming with mineral wealth and graced with a well-educated population and led by stable government, but the Canadian dollar is usually stronger than the Australian dollar. While it’s not that much stronger, it still gives Australian miners an edge. While other competitors like Brazil — with a significantly weaker currency — come with other pitfalls, like more political risk.

As mining is such a major component of the Australian economy, and almost everything mined in Australia is exported, a weaker dollar compared to the US dollar is therefore something that’s generally wanted by the industry.

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Securities Disclosure: I, Scott Tibballs, currently hold no direct investment interest in any company mentioned in this article.

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