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Thursday, 4 June 2015

Trade deficit...WTF?

Record deficit

Today's International Trade figures for April revealed a 13th month of deficit, and a huge one at an enormous $3,888 million!

We haven't seen a result as bad as that in 45 years of international trade figures.


The tin hat brigade love releases like this and will no doubt say that we're all doomed.

So, are we doomed?

Erm, I don't know yet, because I haven't been through the figures.

Let's take a look to see whether we're doomed or not...

Export values drop off

What gives? 

Well, firstly, there was a serious drop in monthly commodity exports FOB values of $2,663 million in April, with iron ore exports (down $567 million) and coal exports ($715 million) the main culprits.

Gold and natural gas declined too in the shorter month of April.

Iron ore should bounce back in due course - spot prices are up by nearly 38 per cent since their trough to a 3 month high, and today revealed a record 38 million tonnes of iron ore exported from Port Hedland in May, a 7 per cent month-on-month increase.

Coal, however, is a headache. 

The ABS noted that part of the coal exports decline was due to port closures and severe weather in the month.

But as I noted here last year, more pertinently a proportion of coal production in Australia is unprofitable, which means that the Australian dollar must fall further in order for it to be so.

China slows

The export figures by destination show the combined impact of a slowing Chinese economy and lower commodity prices.

Export values from Western Australia have accordingly tanked from their peak.

Imports spike

So, yep, the monthly result for commodity export values was an absolute stinker, and the foremost factor in this month's record deficit result.

However, perhaps the most telling chart is the one below, which shows that monthly trade balance for Western Australia completely collapsed in April.

Digging into the data a little further shows that the reason for this was an unprecedented spike in plant and equipment imports from Korea.

No further detail is provided by the ABS, but given that there was a kahuna $1.5 billion spike in merchandise imports in Western Australia we can assume that this was probably related to a major mining project.

In all likelihood, one might hazard that this was rail capex for Gina Rinehart's Roy Hill iron ore project (which typically a business would treat as an investment in a fixed asset for the generation of revenue streams, rather than trading expenditure).

So, yes, a very mucky month for international trade, but the forthcoming months will probably be at least a couple of billion "better".

Firstly, because April's $1.232 billion spike in machinery imports presumably won't be repeated in May and beyond.

Secondly, because Australia's iron ore export volumes have zipped to all-time record highs in tandem with a material spot price rebound.

And thirdly, there could well be upwards revisions to the April figures anyway.

The dollar still probably needs to fall, though, to make our coal exports profitable if nothing else.

Tourism a bright spot

One bright spot for the economy as the dollar has declined has been tourism.

Based on the amazing volumes of Chinese visitors I have been seeing around Australia in recent months, this can surely only increase in the years ahead.