Miners' Iron-Ore Pain Comes With Aussie Twist; Strength of Local Currency Keeps Pressure on the Sector
More than usual, iron-ore miners are in a hole. And the Australian dollar hasn't thrown down a rope.</br></br>Benchmark iron-ore prices are now $70 a metric ton, down nearly 50% this year. The largest miners of the steel-making commodity, with the lowest costs, have ramped up supply even as demand from China has waned. Iron ore accounted for about 40% of earnings before interest, tax, depreciation and amortization at Anglo-Australian miner BHP Billiton in the first six months of the year; at peer Rio Tinto, that figure was nearly 80%.</br></br>Usually, lower prices for Australia's key commodities would go hand in hand with a weaker currency, easing the pain for producers there. The biggest miners price their output and report earnings in U.S. dollars, but their costs for labor, transport and services are denominated in local currency. So a weaker Aussie dollar can effectively reduce costs in U.S.-dollar terms at mines there.</br></br>That hasn't happened this time. The average price of iron ore in the first half of this year was about $110, according to the Steel Index. So far in the second half, it is $86, down about 23%. And while Australia's currency has fallen since early September, on average it has barely budged: Just like in the first half of 2014, one Australian dollar has been worth, on average, US$0.91.</br></br>That makes iron ore's tumble all the tougher. Take Rio Tinto. The miner said in August that a 10% decline in the average iron-ore price would knock about US$1.2 billion off 2014's underlying earnings. But a 10% drop in the Australian dollar would add back about $500 million, mitigating the impact.