How the Australian Dollar Impacts Mining Companies (Updated 2022)

The currency of Australia — the Australian dollar — is one of the most traded currencies on the planet.

Coming in fifth globally on the foreign exchange market (FOREX), the Australian dollar is above the Canadian dollar, but below the US dollar, the euro, the British pound and the Japanese yen. IG reports that 44.15 percent of the trades of currencies go to the US dollar — the top spot — and 3.38 percent goes to the Australian dollar. The Australian dollar is just behind the Great British pound, 6.4 percent, and just ahead of the Canadian dollar, which has 2.52 percent.

As a resources-heavy economy, the Australian dollar moves with the commodities that it exports, like coal, iron ore and gold, linking it to the fortunes of its export clients. More demand for Australia’s resources equals more investment, equals a stronger economy and logically, a stronger dollar.

The land down under famously mines just about everything you can shake a stick at, and that reputation is reflected in the numbers. According to government data, the mining industry makes up some 11 percent of the Australian economy, and Australia is recognised as one of the great resources-intensive exporters — similar to Canada, Brazil and many African nations.

But is 11 percent a lot, or a little? Canada’s economy was 3.14 percent mineral extraction and mining, according to Statcan; the Mining Association of Canada states that mining and minerals typically make up between 2.7 and 4.5 percent of the country’s GDP. In Brazil, another resource-intensive exporter, OECD reports that mining and mineral extraction compose 2.4 percent of Brazil’s economy.

The value of exports to Australia is immense — 57.13 per cent of all export dollars come from resources exports. The continent is teeming with valuable resources, many of which Australia has the market cornered on, as the allure of a wide-open geography, stable and welcoming economy and educated workforce makes it hard to pass by as an investor.

No surprises then that the value of the Australian dollar and the value of Australian mining companies are closely intertwined. The industry is widely regarded, and in 2013 was recognised by the Reserve Bank of Australia, as having lifted Australian standards of living, wages and GDP, and having ensured the economy of the land down under remained without a recession for three decades.

It goes without saying then, that the Australian economy — and its currency — owes its fortunes to the prolific and profitable mining sector.

The Australian mining boom was an economic smorgasbord of wealth, fueled by massive mining investment, primarily in Western Australia. It occurred from roughly 2002 to 2012, and in that decade, the mining industry quadrupled from 2 percent to 8 percent of Australia’s GDP. During that period, the value of the Australian dollar can therefore be seen to track the fortunes of Australia’s export markets. Up to now, that would be China, which consumed 83 per cent of Australia’s iron ore exports in 2020, though ructions between Australia and China could potentially see that change in a worst-case scenario.

Demand from China for raw materials has helped prop up the Australian economy and the dollar, keeping it strong compared to its competitors, with demand for commodities pumping resources and development into the corners of Australia.

In 2020 and 2021, China pulled back on iron and caused a slump, but the Australian government reports that the iron industry rebounded in early 2022. With that said, the projections from that report estimate that, while production will increase through 2027, the overall dollars earned will fall from AU$135 billion to AU$74 billion.

But for all the dependency on China that Australian exporters have, the fact remains that commodities by and large are bought and sold in US dollars, meaning that for Australian miners, a weaker Australian dollar to the US dollar is very much a good thing.

Investors that play in Australian markets will have to keep an eye on where the AUD to USD conversion rate is trending, as with any currency on commodities that cross borders, exchange rates play a large role in when to buy — and when to sell.

For much of the last 30 years, the Australian dollar has been weaker against the US dollar, with it usually being in the range of 60 cents to 90 cents compared to one US dollar. In 2013 it was often at parity or stronger than the US dollar (before falling rapidly afterwards) ,but for the most part the Australian dollar has been reliably around the 70 cents to a dollar mark. For the past five years, Macrotrends reports that the Australian dollar topped out below 82 cents to the US dollar and over the past year has never been above 76 cents to the dollar.

With high Australian wages and higher costs of doing business in Australia, selling commodities in US dollars is a boon for domestic miners, as exchanging the greenback into local currency gives miners an extra boost for their product sold.

A low Australian dollar also makes it easier for North American investors to get into the market simply due to value for money.

As a resources-heavy economy, a lower Australian dollar makes the country more attractive for investors looking at Australia’s competitors, like Canada. Canada is another country teeming with mineral wealth and graced with a well-educated population and led by a stable government, but the Canadian dollar is usually stronger than the Australian dollar. While it’s not that much stronger, it still gives Australian miners an edge. Other competitors like Brazil — with a significantly weaker currency — come with other pitfalls, like more political risk.

As mining is such a major component of the Australian economy, and almost everything mined in Australia is exported, a weaker dollar compared to the US dollar is therefore something that’s generally wanted by the industry.

This is an updated version of an article first published by the Investing News Network in 2021.

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Securities Disclosure: I, Ryan Sero, currently hold no direct investment interest in any company mentioned in this article.