The high Australian dollar is generally considered bad news for business, but some of the recent evidence suggests it is not that simple.
MOST people, when considering the impact of a rising dollar, think about manufacturers like boat builder Austal, which last month was forced to announce a profit downgrade.
Or they think about holiday resorts in the South West that are struggling to fill their rooms as Western Australians instead jet to Bali in their thousands.
These examples are very real, and fit the conventional wisdom.
“In an overall sense, the higher Australian dollar is a negative for the economy,” CommSec chief economist Craig James told WA Business News.
“It encourages consumers to buy imports and travel overseas; it reduces our competitive position.”
Patersons Securities economist Tony Farnham agrees the high dollar is causing commercial pain.
“A lot of tourism and manufacturing is hurting because of it,” Mr Farnham said.
“It’s not just the level, it’s the fact that it moved up so quickly and has an air of permanence.”
With the Aussie dollar trading consistently above $US1.05 this year – the highest, sustained level since it was ‘floated’ in 1983 – business is having to adjust to the new normal.
The Aussie dollar’s strength is not just a function of a weak US currency. On a trade-weighted basis, the local dollar is at its highest level since 1985.
However, both economists emphasise that we need to look beyond these generalisations to get a true picture of what is really going on.
What about exporters who are actually better off because of high commodity prices?
What about local businesses that are able to import equipment at much lower prices because of the high dollar?
Winners and losers
A survey of 300 small to medium-sized business operators last month supported the argument that the high dollar has winners and losers.
Only 23 per cent of the surveyed executives said their business had been adversely affected by the strong dollar.
More than a third (36 per cent) said their business had actually been affected positively.
The Executive Connection CEO Chris Gorman, who commissioned the survey, has a simple explanation.
“It’s clear that many SMEs are actually enjoying the buying power of the Australian dollar and taking full advantage of the favourable conditions,” Mr Gorman said.
Another recent survey also had a surprising result.
Rabobank Australia surveyed 1,200 farmers, who are generally seen as losers from a high dollar because it reduces the value of their exports.
Despite the dollar’s strength, it found that farmers are currently more confident than they have been at this time of year since 2001.
It also found that 51 per cent of farmers expect to have higher incomes over the next 12 months.
Again, the explanation is quite simple. On its own, farmers see the high dollar as a negative.
But there are offsetting factors – farmers have been buoyed by high commodity prices, particularly for wool and cotton, which are near record levels, and good autumn rains across most parts of the country.
The double hit
This is little comfort for a business such as Austal, which said last month that its profit downgrade was “a direct consequence of the unprecedented strength of the Australian dollar and its consequent impact on Austal’s Western Australian operations”.
Austal actually gets hit in two ways: not only does the high Aussie dollar make the company’s products less competitive in overseas markets, it reduces the profits from its international operations when they are translated to Australian currency.
Like many chief executives, Austal’s Andrew Bellamy expects the prolonged strength of the dollar to continue for the foreseeable future, forcing his company to restructure its Australian business.
Mr Farnham said the tourism industry also suffered a “double banger”. The high dollar makes Australia an expensive destination or international tourists, and means overseas travel is more affordable for the locals.
Bureau of Statistics data out this week showed that Australians are responding as expected.
Total overseas departures by Australians were up 29 per cent in April 2011, compared to April 2010.
Indonesia, including Bali, was particularly popular; departures to that country were up 41 per cent.
Conversely the number of international tourists coming to WA shows little growth.
Overall, there was a 2.6 per cent rise in the number of international visitors coming to the state in the year to March 2011.
However, the largest growth was in the number of business visitors, which rose by 23.3 per cent.
For stock market analysts, a high dollar is unambiguously negative.
“At current, let alone even higher Australian dollar levels, major damage is now being done to large sections of the Australian economy such as manufacturing, tourism and education,” a recent Macquarie Equities strategy report concluded.
“This in turn will lower overall economic growth despite the surge from resources and tend to limit further upside to interest rates.”
Accounting firm Taylor Woodings shares this gloomy view. From an analysis of insolvency trends, it said several factors could make conditions worse, including falling business and consumer confidence and weak property markets.
“In addition, we believe the impact of the high Australian dollar on company insolvency rates will continue to be felt, especially in the hospitality, tourism and manufacturing sectors,” the firm concluded.
The Macquarie report, which focused on industrial stocks, played down the significance of the translation effect – the impact on companies like Resmed, Ansell and Brambles that have a large chunk of their business overseas.
For these companies, overseas profits are, by definition, worth less when the money is converted to Australian currency.
“Much more damaging is the negative competitive impact on Australia’s internationally traded industrial sectors such as the manufacturing, tourism and education sectors,” the report said.
“This in turn is having a depressing effect on consumer confidence, especially in those regions where these industries are prominent.”
The biggest losers, according to Macquarie, are expected to be woodchip exporter Gunns and steel producers Bluescope Steel and OneSteel.
Of the major industrial companies, Macquarie said just three would be positively affected – airlines Qantas and Virgin Blue and building materials producer Boral.
Deutsche Bank, which included resources companies in its analysis, reached similar conclusions.
It said the higher dollar would lead to profit downgrades for the overall market of almost 5 per cent.
“Unsurprisingly, the largest downgrades are for resources (minus 10 per cent), given the recent rise (in the dollar) has not been accompanied by higher commodity prices as in other episodes,” Deutsche said.
“Across industrials (excluding banks), the downgrades are minus 2 per cent, with the healthcare and basic materials sector seeing the most significant downgrades.
“In other sectors, the impact is generally confined to one or two stocks.”
Among the ASX100 stocks, Deutsche said the largest downgrades for 2012 earnings (as a result of the higher dollar) were for mining companies Iluka Resources, Oz Minerals and Macarthur Coal, and steel producers OneSteel and Bluescope Steel.
During the past month, several listed companies have cited the rising dollar as a factor in earnings downgrades, though it wasn’t the only factor.
The domestic steel industry has been hit particularly hard, with Bluescope Steel anticipating a loss in the current half-year.
It attributed this to three factors, with the first being the stronger dollar, which negatively affected: its steel exports; the translation value of offshore earnings; and its domestic steel sales (which have an underlying US dollar price).
Bluescope said a second factor was a fall in global steel prices, and the third was weak domestic demand for its products.
OneSteel, which produces both steel and iron ore, downgraded its earnings “due primarily to the impact of the rapid appreciation of the Australian dollar, including an adverse impact on domestic steel margins and volumes and on iron-ore Australian dollar revenue.”
Hills Holdings has halted the manufacture of large pipe and tube products at its NSW factory, saying it had been hit by the “strong appreciation of the Australian dollar, aggressive import competition and the lack of available large-pipe project work in Australia”.
In future, it will import the products it had been producing locally.
The same sorts of pressures are hitting local steel fabricators on the Kwinana strip, which have been battling to win work on large resources projects.
Their ability to compete with larger fabrication yards in Asia just gets harder as the Aussie dollar rises, though the recent awarding of a $50 million contract to AGC Industries shows there are exceptions.
Mineral sands miner Iluka and building materials company Boral (the parent of Midland Brick) highlight the need to look carefully at the circumstances of individual companies.
Iluka is highly exposed to currency movements, yet in the half-year to December 2010 the negative effect of the strong dollar was largely outweighed by higher prices for its core products, zircon and rutile.
The good news on the commodity front continued this week, when IIuka announced a 70-75 per cent rise in rutile prices and a 35-40 per cent rise in zircon prices.
Boral, which has most of its debt denominated in US dollars, announced last month that its results continue to benefit from a positive currency translation effect.
For consumers, the strong dollar is a winner.
In its latest monetary policy report, , the Reserve Bank of Australia said the appreciation of the exchange rate had contributed to falls in the price of many imported goods.
“The price indices for clothing and footwear, furniture, household appliances and audio-visual equipment had all fallen over the year to the March quarter,” the Reserve said.