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Friday, 3 April 2015

Export values decline

Plummeting prices pinching

The mining boom has transitioned into the production stage, which has increasingly become characterised by the export of ever greater volumes of bulk commodities at ever lower prices.

The ABS released its International Trade in Goods and Services data for February 2015 yesterday, which notched up an eleventh consecutive deficit of $1.26 billion, although the trend has been fairly stable.

Bulk commodity export volumes have ramped up enormously over the past decade - as evidenced in the Reserve Bank's chart packs - but margins are being eroded left, right and centre, particularly for iron ore and coal producers, many of whom must now be at or approaching break-even export prices.

FOB values decline

Iron ore prices were smashed yet again overnight, and even the preliminary estimates for February showed that the FOB values of monthly iron ore exports have been crushed, falling by almost 40 per cent since peaking in late 2013.

The LNG story will be an interesting one to watch!

Value of exports to China slides

Monthly merchandise exports to China continue to account for 31 per cent of the total monthly merchandise exports by FOB value, but the decline in FOB values since Q4 2013 has been acute.

Other key monthly merchandise export destinations included Japan (17 per cent of the total by FOB value), Korea (7 per cent), the US (5 per cent) and India (4 per cent).

State versus state

The decline in iron ore and coal prices for their lofty peaks have impacted export values from the key mining states, with Western Australia (45 per cent) and Queensland (17 per cent) remaining the key export states by FOB value.

New South Wales (15 per cent), Victoria (9 per cent) and South Australia (5 per cent) continue to contribute to a lesser extent.

In terms of monthly trade balances by state, Western Australia's position of strength has deteriorated in tandem with the 4.6 per cent decline in the value of exports over the past year.

Tourism improves

Finally, it is noted here that the monthly trade services balance has improved markedly since its nadir.

In particular the lower dollar has seen a sizeable rebound in the tourism sector, with record numbers of Chinese visitors being recorded in 2014. 

Based upon current trends we could comfortably see more than 1 million Chinese short-term visitors per annum to Australian shores within the next 24 months.

The wrap

Despite export volumes having ramped up impressively, the impact of the iron ore and coal price demolition is all too apparent in the decline in the value of exports over the past year.

More concerningly, this data is historic, and the Reserve Bank's Index of Commodity Prices has continued to record material declines through March too, with no end to the decay yet in sight.

The Aussie dollar has declined to below 76 US cents, which will to some extent help Australian exports paid for in US dollars, as is true of many commodities. 

However, the production phase of the mining boom is off to an inauspicious start, with windfall gains to date appreciably lower than most analysts were projecting only one year ago.