27/08/2013 - 15:04

Sliding commodity prices start to crush the $A

27/08/2013 - 15:04


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Sliding commodity prices start to crush the $A

Australia's two biggest exports, iron ore and gas, are facing renewed price pressure, a situation which is starting to be reflected in the exchange rate and which could precede a big fall in the Australian dollar.

Over the past week, the iron ore price has slipped below $US140 a tonne, ending a period of surprising strength thanks to Chinese steel mills re-stocking ahead of the northern winter.

At the same time, Japanese power utilities which are the biggest consumer of Australian liquefied natural gas (LNG), have launched a campaign for a 30% price cut arguing that cheap gas will soon be available from the U.S.

Neither event is a serious threat to Australia's overall financial standing, yet, but that could change if iron ore and gas prices do fall as far as some observers fear.

Iron ore, which is WA's dominant industry, is tipped to hold a price above $US130/t over the next few months, but could then slip closer to $US110/t, and perhaps lower as recently expanded mines start to flood the market.

Some forecasters expect the iron ore price to fall below US$90/t as supply rises and demand in China flattens.

LNG is yet to feel the same sort of price squeeze but Japanese trade officials are applying pressure on Woodside Petroleum and other exporters for discounts or the risk losing market share.

The Japanese, who buy 70% of Australia's LNG, argue that the international LNG pricing mechanism they created 30 years using the oil price as a benchmark, is broken and should be replaced by a system based on international gas prices, especially the super-low U.S. gas price.

Existing Australian LNG exporters should ride out any price change. New entrants, especially Queensland's coal-seam LNG producers and Chevron's twin projects in WA, Gorgon and Wheatstone, could be walking into a painful price squeeze just after they endured an equally painful construction cost squeeze.

In time, the pressure on key commodity exports will drive down the value of the Australian dollar which has already fallen from $US1.05 four months ago to be trading as recently as yesterday at US90c.

However, as news of the commodity-price pressure reached currency traders earlier today the dollar dipped below US90c, and was last trading at around US89.5c, and looking weak.

The dollar's next stop could be US85c, and then down as far as US80c, if Chinese demand for Australian iron ore wilts, Japan ratchets up its demands for a gas discount, and as economics replaces politics as the dominant topic after the diversion of the federal election.

Exporters selling in U.S. dollars will benefit from a continued fall in the Australian currency but consumers will not be pleased as the currency-effect flows into petrol prices and the cost of imported goods, especially electronics, vehicles and clothing.

Goldminers are particularly well placed to profit from the international forces bearing down on Australia with international concern over events in Syria helping lift the U.S. dollar gold price to around $US1400 an ounce just as iron ore and gas-price pressure bears down on the Australian dollar.

The net effect of the gold/currency squeeze is that the Australian gold price has moved back above $A1550/oz and will hit $A1645/oz if the exchange rate dips to US85c, and $A1750/oz at US80c, more than enough to breathe new life into the shell-shocked gold sector.

Iron ore and LNG exporters will also win from a downshift in the currency, a fact that is well-known to Asian customers of both products who will be arguing that they deserve a share of any currency change.

WA's iron ore sector is starting to reflect the possibility of a sustained fall in the iron ore price with higher cost producers being sold down by investors.

Atlas Iron slipped another 2.5c on the ASX today, taking its fall over the past two weeks to 30.5c. BC Iron was 20c stronger, taking its two-week fall to 20c. Mt Gibson shares gained 1 cent today, while Fortescue's stock held its ground.


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