Comparison Analysis of the Australian Dollar with BFI Production, Commodity Exports and Mining Industry

Transcription

1 Comparison Analysis of the Australian Dollar with BFI Production, Commodity Exports and Mining Industry Hee Joong Kim (James) September 10, 2015

2 ABSTRACT Australia is the largest iron ore exporter; it takes up to 43% of iron ore export in the world. Australia exports commodities such as coal briquettes, petroleum gas and crude petroleum. With that reason, the Australian Dollar (AUD) and commodities are highly correlated. This article analyzes correlation of AUD and (1) Australian Mining Industry, (2) Blast Furnace Iron Production, and (3) Amount of Commodity Exported by Australia to see how each of them are related and affected by another. Figure 1 AUD after July 15, 2015 Source: Yahoo Finance 1. of the S&P/ASX 300 Metal & Mining Index and the AUD Figure 2 AUD & S&P/ASX 300 Metal and Mining Index Source: ASX, FRED

3 The AUD and Mining Industry Index data from July 28, 2005 to July 14, 2015 shows correlation of 43.80% for overall period. However, it showed 96.49% correlation during the financial crisis (Feb., 2008 May, 2009). It also showed comparatively high correlation of 76.03% recent commodity price shock (Aug., 2014 May, 2015). ( ~ ) ( ~ ) ( ~ ) FX & S&P/ASX 300 Metal and Mining (Index) 43.80% 96.49% 47.00% 76.03% Table 1 AUD and S&P/ASX 300 Metal and Mining Index by major events Source: ASX, FRED The reason for high correlation between the mining industry and the AUD is that the mining industry generates revenue from international trade rather than its domestic market. Figure 2 captures that the AUD is followed by the mining industry index. It means that the stock price of mining industry is highly affected by the AUD. Depreciating AUD against USD will lead to decline in commodity price, which eventually hurt company s profit. Especially the recent commodity price shock, you can see that commodity has been declined due to strong USD, or weak AUD. Upward ( ~ ) Upper II ( ~ ) Downward Downward II ( ~ ) FX & S&P/ASX 300 Metal and Mining (Index) 74.87% 89.58% 96.49% 76.03% Table 2 AUD and S&P/ASX 300 Metal and Mining Index by time periods Source: ASX, FRED Table 2 shows correlation of the mining index and the AUD by different time periods. It reveals that they even have higher correlation. They ve shown above 75% correlation for all time periods, which implies that the AUD and mining industry index move together closely. 2. of BFI Production and the AUD Figure 3 AUD vs. BFI Production Graph (World and China). Source: World Steel Association, FRED

4 Figure 4 AUD vs. BFI Production Graph (USA). Source: World Steel Association, FRED Figure 3 and 4 compares the AUD with the BFI production of the world and China, and the BFI production of the U.S. The BFI production is a key indicator of iron ore demand. China has been the biggest buyer of the iron ore that it takes about 55.27% of the world s BFI production from January 2005 to May It means that the China has led the demand of iron ore. ( ~ ) ( ~ ) Table 3 between the BFI Production and the AUD by time periods. Source: World Steel Association, FRED ( ~ ) FX & BFI Production (World) 9.98% 95.16% -7.96% -4.22% FX & BFI Production (China) 65.55% 37.82% -2.86% % FX & BFI Production (USA) 5.30% 87.48% 62.92% 86.38% China has shown high correlation of 65.55% for last 10 years. Despite the U.S. shown mere correlation of 5.30% during the same period, it shows very high correlation during a specific time period. During the financial crisis, the U.S. BFI production and the AUD showed 87.48% correlation. Correspondingly, they showed 86.38% correlation during the recent commodity price shock. Unlike Chinese companies, the U.S. steel companies settle payment with the USD. This may encourage higher correlation between the U.S. BFI production and the AUD despite the Chinese companies import more iron ore. This high correlation can give direct impact on the AUD and iron ore price. For example, decline in iron ore demand from the U.S. can depreciate the AUD, which will reduce iron ore price. What happens today is similar that strong USD and decline in the U.S. steel industry drag the iron ore price.

5 One of the unique characteristics in the graph is that correlation between the world BFI production and the AUD changed from positive to negative after the financial crisis. It may come from increasing steel industry in China. The Chinese government may encourage the Yuan to settle payment. During the recent commodity price shock, the China BFI production and the AUD had % while its overall correlation is % for the last 10 years. 3. of the Australian Commodity Exports and the AUD Figure 5 Commodities (left, $ thousands), AUD/USD spot price (right) Source: Australian Bureau of Statistics, FRED Figure 6 Commodities (left, $ thousands), AUD/USD spot price (right) Source: Australian Bureau of Statistics, FRED

6 This report selects 5 categories of Australian exporting products by its total amount of export. All the categories show positive correlations from 40.76% to 54.89% with the AUD. There was a noticeable characteristic in the iron ore. Despite it has a positive correlation of 45.90% for last 15 years, it has negative correlation of % during the recent commodity price shock. It can indicate that the Chinese government encourages to use yuan rather than the USD for trading. ( ~ ) ( ~ ) ( ~ ) FX & Mineral fuels 40.76% -4.22% 30.51% 54.93% FX & Iron 45.90% 32.70% 10.71% % FX & Non-ferrous metals 45.08% 60.26% 10.71% 14.32% FX & metals, nes 50.06% 14.66% 3.79% 57.11% FX & commodities not in SITC 54.89% % 12.48% 11.98% Table 4 between Australian exports by amount and the AUD. Source: Australian Bureau of Statistics, FRED Despite Australian exporting products show positive correlation overall, it is not as significant as other indicators such as the S&P/ASX 300 Metal & Mining Index and BFI production. It is because the Australia s main trading partner is China, not the U.S. 4. Conclusion After examining a wide variety of data, it appeals that the AUD has higher correlation with demand of iron ore from the U.S. rather than supply and/or production of iron ore. The report also reveals that the mining industry is highly affected by the AUD. It means that U.S. manufacturing industry, especially steel industry, impacts on the AUD, which will eventually impact on the Australian mining industry. Going further, the report captures that the Chinese government has attempted to reliance on the USD. Recall that overall correlation of the Chinese BFI production and the AUD is more than 65% last 10 years, the correlation is % since last year. It implies that the Chinese government replaces the USD to the Yuan.