Exchange rate recovery provides easing of imported costs

Saturday, 13 June 2009

This week we take another look at exchange rates and their impact on construction costs. With the Australian dollar moving back up again it is important to understand exactly how this will impact your construction budget.

 

Firstly what has happened to the two major currencies traded?

 

Both the US$ and the Chinese Yuan have followed similar trajectories since the start of 2007. During 2007 and much of 2008 the Australian dollar strengthened substantially against both currencies, as our commodity exports boomed.

 

Also the higher level of interest rates on bank deposit accounts during 2008 in Australia compared with elsewhere attracted foreign deposits in Australian denominated bank accounts (the so-called “carry trade”).

 

A strong Australian $ has the effect of making imported prices cheaper. This includes imported building materials, fixtures and fittings, such as glass, lifts and escalators, aerobridges, hospital equipment, granites and marbles, vehicles and cranes, ceramic ware, tiles, tapware, machine tools and numerous other items.

 

With the global downturn commencing in 2008 and a collapse in commodity prices the Australian dollar quickly became considered a risky currency and despite the greater severity of the downturn in the USA a flight to the safe haven status of the US$ followed. This in turn caused the Australian dollar to collapse quickly by around 30%, as businesses and investors traded in their holdings of Australian $ deposits.

Aussie fluctuations against Chinese currency

As the charts show the fall in the Australian $ was severe and the charts for both currencies show remarkable similarity.

 

Increase - collapse - recovery

Price increases were reflected in the cost of imports early in 2009.

 

Now confidence is improving, resource shares are recovering and commodity prices are strengthening and the Australian dollar has recovered substantially from the lows of early 2009. Once again that will make it cheaper to import goods and this will be reflected in lower building costs.

 

Amidst all of this currency fluctuation how do you assess the impact on your construction costs?

 

Importantly, prices actually tend to fluctuate less than exchange rates would indicate due to the phenomenon of “pricing to market”.

 

When exchange rates strengthen and imported prices fall importers will try and hold off passing on price decreases for as long as possible to increase their profits,

 

When exchange rates weaken and prices increase the country of origin may factor in the need to remain competitive in the export destination and will cut prices for a while to keep the delivered cost the same.

 

For this reason prices often feed through after a time lag, with the importer holding off price changes to the extent that it makes commercial sense, and protects their profit margins.

 

No doubt this new round of improvement in the Australian $ exchange rate will take some time to be reflected as lower prices of imported goods.

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