23/10/2007 - 22:00

High dollar squeezes exporters

23/10/2007 - 22:00

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With the Australian dollar pushing through its previous ceiling against the US dollar in recent days, exporters are facing lower profit margins and analysts are speculating on the possibility of parity between the two currencies.

With the Australian dollar pushing through its previous ceiling against the US dollar in recent days, exporters are facing lower profit margins and analysts are speculating on the possibility of parity between the two currencies.

The local currency hit a 23-year high on Monday last week, of US90.79 cents, before closing below 90 cents on Friday.

BankWest economist Alan Langford said he thought the dollar was unlikely to reach parity with its US counterpart, although there was a possibility of this occurring within the next few years.

“I think something will crack before that happens,” he said.

“[The Australian dollar] has probably got further to run because the US dollar has got further to fall, but I wouldn’t think the US dollar would fall far enough for Australia to go to parity.”

While the mining industry has been somewhat protected by high commodity prices, profit downgrades will be more likely if the dollar remains at its current level.

Mineral sands miner Iluka Resources Ltd downgraded its profit forecast last week by about 20 per cent, its second adjustment for the year.

Iluka attributed the revised forecast of between $45 million and $50 million, based on an exchange rate of US90 cents, to the rising Australian dollar and lower production.

It follows a cut to the company’s annual net profit estimate in July, when its forecast of between $90 million and $100 million was stripped to between $55 million and $65 million.

Hartleys resources analyst Andrew Muir said the high Australian dollar would put pressure on the revenue streams of most mining companies across most commodities, including base metals, iron ore and gold.

He said miners were more likely to engage in hedging, although this could hamper their ability to maximise profits.

“It limits the amount you can gain if the Australian dollar drops, but conversely, it limits your loss,” Mr Muir said.  “I know several companies that have already taken out forward contracts. Ideally, you don’t want to take out forward contracts for all sales.”

Other factors, such as production output, could exacerbate the effect of the exchange rate, he said.

“The strong Australian dollar will definitely hurt exporters and if it’s combined with any production downturn, it’s a double whammy,” Mr Muir told WA Business News.

Austrade chief economist Tim Harcourt said the high dollar would benefit businesses such as those importing expensive equipment, while others would be disadvantaged.

“It can help some, but I certainly reckon the high dollar will hurt many exporters,” he said.

However, Mr Harcourt said businesses were unlikely to change their behaviour in a significant way to compensate for the high dollar, according to recent research.

“That [research] showed four out of five exporters said the dollar didn’t affect their business decisions,” he said.

“Breaking into the world market and relationships with key players were the top priorities.”

Mr Harcourt said exporters would have to adjust to the reality of a high dollar.

“To build a long-term business, you can’t just pull out when the dollar is high,” he said.

Sectors such as agriculture and tourism, which could not rely on high commodity prices, were most likely to be affected, Mr Harcourt said, as were some manufacturers.

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