Falling exchange rates could provide a boost to low cost commodity producers as Chinese production and a rising renminbi provide price support at the top of the curve.

Commodity currencies have fallen significantly against the dollar in the last six months. Since the beginning of 2013 the South African rand has fallen by 30%, the Australian dollar by 18%, the Brazilian real by 14% and the Chilean peso by 13%. Since mining companies operating in those countries make their sales in USD, but pay part of their costs in the local currency, this has the effect of increasing margins as long as prices remain steady. Citi analysts Heath R. Jansen and David B. Wilson estimate that between 15% and 50% of costs (including salaries, energy, and some procurements) are paid in local currencies.

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China is the new high cost commodity producer

When these countries were the high cost producers, falling currencies simply pushed down the cost curve for commodities and prices fell in response, but South Africa, Australia and others have been pushed down the curve by Chinese production, which occupies the high end of the cost curve for many important metals. And its currency is strengthening, the gap between China and other producers is growing further apart.

“Unlike in previous cycles, commodity prices are being supported by high cost production in China,” write Jansen and Wilson. “China now dominates the top end of the cost curve… this is resulting in a steepening of the cost curve and benefiting the low cost producers.”

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Rio Tinto, Anglo American most affected

Rio Tinto plc (ADR) (NYSE:RIO) and Anglo American plc (ADR) (OTCMKTS:AAUKY) (LON:AAL) are the most heavily impacted by the falling currencies (AUD and ZAR respectively), but Jansen and Wilson are still Neutral on Anglo, which they call their “least favoured large-cap miner”. Instead they think investors should focus on diversified miners including Rio Tinto, BHP Billiton Limited (ADR) (NYSE:BHP), and Glencore Xstrata PLC (LON:GLEN) (which they rate as Buys).

There is still a lot of negative sentiment around commodities, and there is reason to worry about price support for gold in general, but it’s exactly this negative sentiment that could make diversified miners such an interesting investment right now, just as their margins are growing and momentum is turning positive thanks to falling local currencies.