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Saturday, 2 April 2016

Commodities index jumps

Index rebounds

According to the Reserve Bank over the past decade commodity exports have on average accounted for more than 55 per cent of our total export values and 11 per cent of our GDP.

The Reserve Bank of Australia (RBA) Index of Commodities prices surged by an estimated preliminary +5.3 per cent in March, following on from a revised +2.1 per cent in February.

The jump was driven by rebounds in the price of iron ore, oil, and gold. 

Note how the RBA now produces sub-indices which include spot pricing for iron ore and coal, which has arguably become relatively more important as producers have moved to shorter term contract arrangements (although average export price movements are of course still rather important). 

If you've been on holiday to the States recently, you may have noticed a resurgence of the Aussie dollar in recent weeks, which has dampened the impact of this rebound in Aussie dollar terms. 

In AUD terms the index is 12.1 per cent lower than one year ago.

From 1 April, the Reserve Bank has issued new weights for its Commodities Index.

The Index of Commodity Prices is a "Laspeyres Index", meaning that it's a weighted average of changes in commodity prices, with weight attributed to each commodity according to its relative importance.

Despite downward re-weightings the bulk commodities iron ore and coal remain the most important commodities for Australia by some margin.

Indeed, to reflect this, from April forward the RBA will produce a separate index for the bulks.

Other notable changes included the increasing relative importance of LNG (from 8.1 per cent to 8.8 per cent of the index).

The weights for beef & veal, and lamb & mutton have also increased, but since milk powder now accounts for less than half of one per cent of export values, it is no longer to be included in the index weights.

The wrap

That makes a whole two good months in a row for commodity prices, although the impact has been dampened a little by movements in the currency. 

Whether this can be sustained into the coming months will largely be determined by the wild fluctuations of the iron ore price, and where the oil price ends up deciding to settle.

With the economy growing by 3 per cent last year the media focussed on the decline in national income. There'll probably be a rebound this quarter, however, looking at these figures.