As global markets find support this week, Australian markets continue to flounder amidst poor exports and a climbing Aussie dollar.
With earnings figures being released to the market this week, Xstrata kicked things off with a warning that this earnings season for miners may be one of the toughest yet and reported a net profit slump of 33% for the first half. Next out of the gates was Rio Tinto, Australia’s largest exporter of Iron Ore and second in the world behind Vale. Rio’s half-yearly output has been as anaemic as Xstrata’s and this is more than likely going to be the story for the other major miners.
Net income declined for the period - despite still coming in at a whopping $5.9 billion - compared to $7.6 billion last year. The underlying story and threat remains the same: a slowing demand in China and rising costs of production. This will be the excuse that all the major miners adopt.
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There are a few other issues that are likely to hamper the profitability of Australia’s mineral exporters, including the Dollar. The Aussie dollar is hovering around its highs of the past four months and shows no signs of weakening. Larger players such as Rio Tinto, BHP and Fortescue Metals can offset reduced demand due to higher buying prices for international customers through economies of scale and increased efficiencies in production. But smaller players are at the mercy of a higher dollar, which is a major barrier to sales volume and production. The strong Australian Dollar makes mining exports less attractive to overseas buyers. Countries with a less than desirable economic outlook are also seeing an outflow of dollars. This makes net importers of raw materials a very attractive buy proposition. A lower dollar means cheaper iron ore, which means tougher competition for Australian exporters.
Current volatility has not helped the Australian mining situation. Full year earnings will likely be revised in the coming weeks as investors brace themselves for what should be a relatively unsurprising, yet disappointing 2012.