Apr 06 2020
Several Australian industries are expected to be assisted by the recent depreciation of the Australian dollar (AUD), amid an escalating global downturn sparked by the COVID-19 pandemic. IBISWorld has examined four industries that are likely to benefit from the weaker AUD, particularly as economic conditions deteriorate.
Iron ore mining
The Iron Ore Mining industry has yet to be significantly disrupted by COVID-19, despite the imposition of social distancing measures on fly-in-fly-out workforces in Western Australia. The industry is highly export-oriented, with exports expected to account for 84.9% of revenue in 2019-20. Iron ore is bought and sold in US dollars in global markets. The recent depreciation of the AUD has reduced Australian iron ore prices for overseas buyers, which typically boosts product demand and price competitiveness.
While the depreciation of the AUD is likely to assist iron ore miners, the negative influence of reduced global demand is expected to outweigh this factor. Iron ore miners are expected to suffer reduced demand from China, as weaker manufacturing activity leads to lower demand for steel. As a result, iron ore prices are expected to decline and translate into a 3.8% fall in iron ore volumes for the year. In turn, this trend is expected to cause industry revenue to decline by 8.7% to $83.4 billion in 2019-20.
Economic stimulus in China, such as infrastructure development programs, could provide some support for iron ore prices by driving up demand for steel. In this scenario, the weaker value of the AUD would become more beneficial, supporting key exporters such as Rio Tinto, BHP Group, and Fortescue Metals Group.
Another commodity susceptible to changes in the exchange rate is alumina, which is used in aluminium production. Australia is the world's largest producer and exporter of alumina. The Alumina Production industry also trades in US dollars, therefore the value of the AUD has a significant influence on industry profitability and revenue. The weaker value of the AUD is likely to provide critical support to alumina producers. Australian alumina exporters such as Alcoa of Australia and South32 Limited are expected to suffer from a downturn in global demand led by declining manufacturing activity across Asia. Despite the benefit of a weaker AUD, the dip in production combined with plummeting commodity prices is expected to translate into a 17.7% decline in industry revenue to $8.1 billion in 2019-20.
Liquefied natural gas production
The Liquefied Natural Gas Production industry is also affected by exchange rate volatility. The recent depreciation of the AUD is likely to support Australian natural gas exporters, by increasing their price competitiveness in global markets. The support of a weaker AUD has come at a critical moment for firms in this industry, which have been threatened by the historic collapse of global oil prices in March.
Oil and natural gas are partial substitutes, leading to a strong link in the prices of both commodities. A breakdown in the negotiations between major oil producing nations has led to a ramp up in oil supply, at the same time that demand for oil has declined due to the COVID-19 pandemic. This has led to a drop in oil prices from $60 USD per barrel in January 2020, to less than $30 USD per barrel in April. In addition, Australia’s two largest export markets for natural gas, China and South Korea, have both experienced significant outbreaks of COVID-19, undermining economic activity and demand for natural gas.
A significant threat for Australian natural gas exporters is the risk of Chinese buyers invoking force majeure clauses in their supply contracts. These clauses give the buyers the ability to revoke their contractual obligations to purchase gas, amid unforeseeable external circumstances such as a global pandemic. The closure of Chinese ports could result in force majeure being triggered. Overall, this industry is expected to post lower revenue in 2019-20, despite the assistance of a weaker AUD.
Medical and surgical equipment manufacturing
The Medical and Surgical Equipment Manufacturing industry is of vital importance in the fight against COVID-19. Export markets represent the industry's largest revenue stream, accounting for 51.7% of revenue in 2019-20. As a result, a depreciation of the AUD is a significant boost for the industry, as it leads to an increase in revenue in local currency terms. The industry's largest export markets tend to be developed economies that make substantial expenditure on health care, such as the United States, United Kingdom, and the Netherlands.
It is possible that output from this industry will be re-directed from export markets to local hospitals, which would mitigate the benefit of a weaker AUD. Firms in this industry have been ramping up output amid a surge in global and domestic demand for medical equipment. Overall, revenue in this industry is expected to grow at an annualised 4.7% over the five years through 2019-20, to $4.4 billion, including growth of 1.9% in the current year.
For more industry insights, subscribe to Industry Insider today.
IBISWorld reports used to develop this release:
- Medical and Surgical Equipment Manufacturing
- Iron Ore Mining
- Alumina Production
- Liquefied Natural Gas Production
For more information, to obtain industry reports or to arrange an interview with an analyst, please contact:
Strategic Media Advisor – IBISWorld Pty Ltd
Tel: 03 9906 3647