Russell

Thomson Reuters






(Repeated with no change to text)


--Clyde Russell is a Reuters columnist. The views expressed
are his own.--





By Clyde Russell


LAUNCESTON, Australia, Feb 5 (Reuters) - Some people love
conspiracy theories and the latest is that the Australian
central bank is deliberately weakening its currency to save the
country's big iron ore miners.


That's the opinion of Lourenco Goncalves, chief executive of
U.S.-based iron ore and coal miner Cliffs Natural Resources
but, like virtually all such theories, it fails the test
of logic and credibility.


Goncalves argues that the Reserve Bank of Australia (RBA)
has manipulated its currency to help his much bigger rivals, the
Anglo-Australian pair of Rio Tinto and BHP Billiton
.


In comments made on Tuesday, the same day Australia's
benchmark rate was cut by 25 basis points to a historical low of
2.25 percent, the outspoken CEO said the RBA was "taking no
prisoners" with the Australian dollar.


"They want to help BHP, they want to help Rio Tinto, they
want to help that lady over there, Gina whatever," Goncalves
said, a reference to Australia's richest person, Gina Rinehart,
whose company is due to start up the 55 million tonne a year Roy
Hill mine in Western Australia later this year.


"They are going to continue to help Fortescue Metals Group
and they will believe that they will always crush
Chinese producers. Big mistake, but it is what it is," Goncalves
was reported as saying by the Sydney Morning Herald.


The comments have attracted a lot of attention in Australia.


As with all good conspiracy theories, there is an element of
truth to them, in so far as the RBA has made it clear for more
than a year that it believes the Australian dollar is
overvalued, especially in the light of the sharp fall in
commodity prices in the second half of last year.


But the suggestion that the interest rate cut was designed
to help specific companies is laughable and betrays a complete
lack of understanding as to how the RBA operates.


The RBA's main function is to control inflation while
keeping employment at an optimal level for economic growth.


Inflation is currently muted - 1.7 percent year-on-year in
the fourth quarter of last year, below the RBA's 2-3 percent
target range.


This means the RBA is more worried about employment, and
that is indeed what it highlighted in the release accompanying
the rate cut.


While the resources sector accounts for much of Australia's
export earnings, mining only employs 2.4 percent of the working
population, putting it well behind sectors such as health and
education, manufacturing, retail trade and financial services.


It's these sectors the RBA would have been targeting with a
rate cut, aiming to provide relief to manufacturers while at the
same time boosting business and consumer confidence in the
expectation that this would increase lending and spending.


If the rate cut has the added impact of lowering the value
of the Australian dollar, that is an added bonus for the RBA,
not its central aim.





FED, NOT RBA, WEAKENING AUSSIE


But let's assume for a moment that Goncalves is correct, and
that the RBA is deliberately weakening the currency to boost the
fortunes of his rivals.


If that is the case, it's not really achieving very much.


Yes, the Australian dollar did slump 0.5 percent to a
near-six-year low on the day of the rate cut.


But that was the first rate cut since August 2013, and in
the period of absolutely steady rates between then and this
week's reduction, the local dollar slumped 15 percent against
its U.S. counterpart.


This suggests it's not RBA action that is driving the value
of the Australian dollar. Rather, it has been losing value
against the greenback, along with other currencies, as the U.S.
Federal Reserve moved to end its quantitative easing and signal
interest rate increases.


How much of a boost has the weaker Australian dollar been to
iron ore miners? The answer is it has helped to lower costs, but
probably not by that much.





Spot iron ore in Asia <.IO62-CNI=SI> dropped to $61.40 a
tonne on Wednesday, to be down 13.8 percent so far this year,
adding to the 47 percent decline in 2014.


In Australian dollar terms it is down 9.1 percent so far
this year, having dropped 42 percent over 2014.


This has no doubt helped lower the U.S. dollar cash cost per
tonne of ore produced, but not to the same extent as the more
than 50 percent plunge in crude oil prices since the middle of
last year, given miners' reliance on diesel for power and
transportation.


Finally, it's also worth pointing out that Goncalves'
company produces some 11 million tonnes of iron ore annually at
its mining complex in Western Australia state, which is about
half of what the company produces in the United States.


Presumably he, too, then is a beneficiary of the weaker
Australian dollar, but for this he should be thanking the Fed
rather than blaming the RBA.