1crise/Oz36/mil/net/earn/neg/2c/Rand/US21mil
1crise/Oz36/mil/net/earn/neg/2c/Rand/US21mil ----------------------------------------------------- http://c.moreover.com/click/here.pl?j40514025 --------------------------------------------------------------------- Currency shifts: BHP weeps, Qantas laughsJune 15 2002 --------------------------------------------------------------------- The rising dollar is a nightmare for some but a dream for others, writes John Garnaut. --------------------------------------------------------------------- According to a popular myth, a 10 per cent rise in the Australian dollar translates into a 3 per cent cut in company profits - on the grounds that 30 per cent of Australian company profits are generated overseas. --------------------------------------------------------------------- The reality is far more complex, and it can be brutal. Some of Australia's leading companies have been battered by the rising Australian dollar and plunging US dollar, while others are set for windfall gains. The contrast between two of Australia's corporate icons, BHP Billiton and Qantas, couldn't be more telling. --------------------------------------------------------------------- Using the companies' own currency sensitivity assumptions, the falling greenback would have punched a $320 million hole in BHP's balance sheet in May alone, and given Qantas a $450 million bonus. --------------------------------------------------------------------- Companies can neutralise the impact of the falling US dollar by "hedging" their exposure to export prices. This can be done simply by setting future prices at today's exchange rates, or by buying Australian dollars to be delivered at a future date. The falling US dollar can even be a positive if a company relies on imported inputs or if its liabilities are held in US dollars. --------------------------------------------------------------------- But unfortunately for BHP, its revenues are earned in US dollars, it prefers not to hedge against currency movements, and its inputs and liabilities are mainly in Australian dollars or South African rand. --------------------------------------------------------------------- Qantas, on the other hand, pays fuel costs and a fair chunk of maintenance costs in US dollars. Allowing for the fact that some of its revenue is derived in US dollars, Qantas estimates that every US1c rise in the Australian dollar adds $14 million to pre-tax operating profits. --------------------------------------------------------------------- Deutsche Bank analyst Kevin O'Connor says Qantas's earnings in the first half of this calendar year have already been boosted by a stronger Australian dollar, and second-half earnings will be better still. If the dollar averages around US59c in the second half, which he thinks is conservative, it will add at least $75 million in cash-flow benefits compared to first-half results. --------------------------------------------------------------------- But this tells only about the airline's cash flows, which is a fraction of the story. The impact of the rising dollar on Qantas's capital account is astronomical. --------------------------------------------------------------------- As luck would have it, Qantas ordered 47 new Boeing and Airbus aircraft in late 2000 and in 2001 - when the dollar was at its lowest levels yet seen. The massive capital expansion program is being paid in instalments over 10 years. --------------------------------------------------------------------- Qantas chief financial officer Peter Gregg says that every US1c rise in the Australian dollar benefits the airline's capital expenditure bill to the tune of $132 million. In short, what was looking like a $10 billion capital expense last year, when the dollar hovered around US50c, is now looking more like $8.6 billion. And it's falling fast. --------------------------------------------------------------------- Meanwhile, BHP Billiton must be ruing the timing of its decision to stop hedging. --------------------------------------------------------------------- This time last year the company was reeling from a $208 million hedging loss because it had locked in its currency exposure as the Australian dollar was falling. So BHP untied its hedges - but probably picked the worst time to do it. --------------------------------------------------------------------- At the time, BHP announced that it was sufficiently large and diversified to ride the bumps and troughs of global markets. The claim rings true in respect of commodity prices, as the new combined entity produces such a diverse range of commodities that price falls in some areas are largely offset by rises in others. But it's beginning to sound hollow in the case of currency movements. --------------------------------------------------------------------- So far this year, the rising Australian dollar, the soaring South African rand and the plunging US dollar have conspired to squeeze the mining giant in all directions. --------------------------------------------------------------------- The bulk of the company's assets are located in Australia and South Africa - that's why most of its operating expenses are incurred in Australian dollars or South African rand. Liabilities such as tax, long-service leave and mine rehabilitation costs are also mainly incurred in dollars and rand. The company also has rand-denominated debts. --------------------------------------------------------------------- But set against these costs and liabilities - which are rising in US dollar terms - is the fact that virtually all of the company's sales are priced in diminishing US dollars. BHP estimates that the net impact of a US1c rise in the dollar cuts $US36 million from net earnings, and each US0.2c rise in the rand strips $US21 million. --------------------------------------------------------------------- The result, according to analysis by UBS Warburg, is that currency movements will reduce fourth-quarter profits by more than half a billion dollars (depending on currency movements for the rest of the month). And there is more to come. A UBS Warburg client note warns: "A further US3c rise in the Australian dollar to US60c would see the fourth quarter profit almost wiped out." --------------------------------------------------------------------- BNP Paribas admitted in a recent client note that it had "significantly underestimated the impact of the rising currency" because it made no allowance for the impact on monetary liabilities. UBS Warburg and Merrill Lynch have followed suit. --------------------------------------------------------------------- Of the half-billion dollar wipe-out from BHP June quarter profits caused by currency movements, only around $80 million will be ongoing cash flow losses and the rest will be one-off balance sheet losses. This means that most of BHP's balance sheet pain will be felt as a one-off hit, experienced only in the reporting periods in which the currency movements occur. The rest - around 16 per cent of expected currency-related losses in this quarter - will be felt as an ongoing cash flow hemorrhage for as long as the currencies remain at current levels. Any further rise in the Australian dollar or South African rand will produce a further one-off balance sheet hit and will add to the volume of the ongoing cash flow hemorrhage. --------------------------------------------------------------------- The Australian dollar has risen 11 per cent this year and the rand 15 per cent, and the impact shows on the comparative share prices of BHP and Qantas. Since mid-February, when the dollar really began to kick, BHP's share price has lost around 13 per cent. Over the same period, Qantas shares have gained 15 per cent. --------------------------------------------------------------------- The Australian dollar may have reached its lowest point ever last year, and most analysts predict that both the dollar and the rand have a long way left to run. Given long-run improvements in inflation and terms of trade, some economists expect the dollar to rise towards the 1990s average of US72c. --------------------------------------------------------------------- Trying to guess currency movements is a shortcut to failure. But those who guess right, and who understand the workings of currency movements on different company balance sheets, stand to make a bundle. ---------------------------------------------------------------------
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