Parity could push some players to the wall

01/10/2009 - 00:00

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A stronger Australian currency will pose major challenges in the year ahead.

Parity could push some players to the wall

FORGET global warming. Forget the threat of rising interest rates. Forget fickle fluctuations on the stock market. The big issue, which ought to have everyone in business on full alert, is 'parity'.


Officially, parity means equality. But, that's just a dictionary definition.


In business, parity is a term reserved for foreign exchange, specifically the relationship between currencies and, in the case of Australia, the relationship between the US dollar and the Aussie dollar.


For anyone planning an overseas holiday, parity, where $1 equals $US1 is good news. It's also good news for importers of capital goods priced in US dollars, the cost of petrol, and fancy foreign booze.


But for Australian exporters who sell in US dollars, and that means just about everyone, parity is a daunting prospect for one very simple reason - falling income.


Wheat farmers are among the first to notice the unpleasant effect of the rising value of the Australian dollar, or falling US dollar if you prefer to see it that way. Whether it's a push up, or a pull down, the effect is the same, fewer Aussie dollars in the hands of the farmer when his wheat is sold in US dollars.


Over the next 12 months, as worldwide economies realign in the back-draft of the global financial crisis, the Australian dollar is likely to emerge as one of the stronger currencies. Some forecasters can see parity being achieved by mid-2010.


In a way this is cause for celebration because it will show that we have done better, or not as badly to be more accurate, than most other countries.


The problem with winning is that there is always a price to be paid. For winners in football, that means repeating last year's performance. In the foreign exchange game it means becoming less competitive as the currency rises in value.


Gold is the classic example for Western Australia. In US dollar terms, gold has been hovering close to the magic $US1,000 per ounce mark for much of 2009.

On conversion to Australian dollars, the gold price has plunged from more than $A1,500/oz to $A1,100, a 26 per cent fall in nine months.


The same is happening with prices for most of WA's exports because raw materials such as iron ore, alumina, oil and gas, are sold in US dollars.


If there is good news in the promise/threat of parity it is that WA is unlikely to suffer from the effects of what economists once dubbed 'Dutch Disease.'


This phenomenon was first observed when the Netherlands enjoyed a natural gas boom in the 1960s. Soaring income from gas sales pushed the value of the guilder through the roof, making Dutch-manufactured goods uncompetitive, and closing factories across Holland.


WA, with almost zero manufacturing, cannot catch Dutch Disease, but the rest of the country can.
As parity nears, for the first time in 30 years the Australian economy will be re-shaped by the changing value of currencies.


WA's mineral exporters will find it tougher going, but Asian demand for raw materials will save the day.
In the south-east corner, the rust-belt states of Victoria, South Australia and NSW will be hit hard as their manufacturing industries lose export markets and require additional government hand-outs, which will be funded by exporters in WA and Queensland.


Private equity perils


IF early indications are correct, the clever chaps re-floating the old Myer retailing business will struggle to attract investors.


While no-one questions that Myer has improved under the hard-nosed management of the American private equity group that bought it several years ago, it is also true to say that nothing has changed at Myer, which still sells socks, jocks and other essentials.


What has changed is the investment climate, and even if the stock market has improved dramatically from a year ago, the outlook is not certain. Many seasoned observers expect a second downward leg, or a prolonged period of stagnation.


The problem is two-fold. What happens when government stimulus ends and we all hope that the private sector picks up the slack? Or, will governments keep printing money and allow inflation to run riot?


It would be cheeky of Bystander to suggest that Myer, and a few other big name floats on the way, are dashing to beat the next downturn and might be pricing their share offerings on the basis of either: (a) a continuation of relatively good times; or (b) that investors have forgotten that the current owners of the assets desperately need a high price to recoup some of the outrageous prices they paid in the boom.


While not giving investment advice, Bystander thinks it would pay to look very carefully at any business being floated out of private equity ownership, and be prepared to say no.


Power and influence


IT'S an unusual experience to be sitting at an investment conference with a child's nursery rhyme running through your head.


That, however, is what happened to Bystander last week when attending the Resources Rising Stars on the Gold Coast.


The rhyme which wouldn't go away was the one about the man on the stairs ... "when I was going up the stairs, I met a man who wasn't there, he wasn't there again today, oh how I wish he would go away".


Unpresent, if that's a word, at the conference was Kerry Harmanis, star of Bystander's return column last week, and subject of the first five minutes of a talk on Talisman Mining by its managing director, Gary Lethridge.


The curious thing is that Mr Harmanis is not a director of Talisman, just a big shareholder, who previously employed most of the Talisman staff at Jubilee Mines.


"Kerry is retired now," Mr Lethridge said. "He's certainly enjoying his retirement, but he's very, very, supportive of Talisman, and very enthusiastic about what we're doing, and believes in what we're doing and how we're going about it."


Bystander might be old fashioned but he thought retired meant retired and not being "supportive and enthusiastic" about the day-to-day work of a mineral explorer.


Listening to Mr Lethridge it's a fair bet that the chaps at Talisman don't do much without getting the tick of approval from "the retired one".

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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