Currency Devaluation – Good or Bad for South Africa’s Coal Miners?

BRISBANE, Australia - July 4, 2013 - PRLog -- South African coal exporters are enjoying the benefits of local currency weakness, at least in the short-term. Producers polled by the South African Coal Report (SACR) said there had been a 5% to 10% improvement in revenues, although there were also fears that the benefits could be short-lived as the effects of inflation took hold.

The South African rand has been the most impacted of emerging market currencies this year. It fell 11% against the US dollar in May and notwithstanding a brief rally during June, the currency has fallen 15% over the last 12 months.

Apart from general emerging market contagion, which has also seen the Brazilian currency weaken among others (while the Australian has also faltered against a stronger US dollar this year), political problems in South Africa gave particular impetus to the currency’s sell-down.

“The devaluation in the rand has given us a 5% to 6% positive boost on revenue,” said Don Turvey, CEO of Continental Coal, an Australian-listed coal producer currently commissioning its Penumbra mine which will take total production to beyond 2.8mtpa.

“Export coal producers in South African haven’t been as negatively affected by US dollar coal price weakness as in Australia and Indonesia. But the 30% fall in the dollar price of coal has been largely offset by the rand” said Turvey. About 60% of Continental Coal’s production is for the export market.

“It has put South African coal exporters in a position of strength because our margins are a bit more protected,” says Turvey.

Analysts at Macquarie Research, however, warn against too much exuberance in respect of currency weakness benefits. “Currency devaluation tends to lead to higher imported inflation, and this feeds through into domestic costs, and wage demands, so providing only temporary benefit to miners,” Macquarie said in a recent note.

Cobus Loots, head of mining at Shanduka Resources, which is a part owner in Shanduka Coal which Glencore Xstrata, said there was an inverse correlation between the dollar prices of commodities and the rand.

“There’s no doubt the recent weakening in the rand has created some opportunities for us, but the dollar coal price is also weaker. And a very weak rand over medium term means inflation of capital goods and consumeables,” he said.

Peter Attard Montalto, a strategist for Nomura International, believes from a currency perspective, the South African Reserve Bank will not interfere with the currency beyond, perhaps, helping to smooth out some of the volatility in its trading patterns.

He believes the strengthening of the rand would be heavily motivated by wide-ranging political changes in the mining economy such as committing to restructuring of the industry even if it means job losses over a longer period, a statement of intent he doubts ahead of national elections in 2014.

“The short term risks of wage negotiation and power shortages are very real, and could see the currency fall further,” said Macquarie.

“But our South African economist believes the rand is fundamentally undervalued and if these problems are avoided or minimal, the expected fiscal consolidation and current account improvement could see a rally towards 8.8 against the dollar by the year-end.”

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