Reuters Australia
Australia export price boom underpins economy
Friday July 18, 02:31 PM
(Adds analyst reaction)
By Wayne Cole
SYDNEY, July 18 (Reuters) - Australia's export prices leapt a record 13.5 percent last quarter as Chinese demand fuelled huge increases in iron ore and coal, an economic windfall that sets it apart from other industrial nations less blessed with resources.
The jump more than compensated for a 1.4 percent rise in import prices in the second quarter, which included a near 16 percent increase in fuel costs, government data released on Friday showed.
Indeed, apart from fuel and by-products like fertilizer, import prices were held back by the rising Australian dollar, which could mean next week's consumer price report might not be quite as inflationary as first feared.
As a result, Australia's terms of trade -- what it gets for exports compared to what it pays for imports -- looked to have climbed by around 12 percent in the quarter, a boon to profits, employment, dividends and tax receipts.
"The terms of trade, which effectively measure the nation's living standards, continues to surprise on the upside," said Su-Lin Ong, a senior economist at RBC Capital Markets. "It is a once in a generation shock which has underpinned a 13 percent increase in real incomes over the last five years."
Leading the export bonanza was a 54 percent rise in the price of coal, while metal ores increased by 27 percent.
Miners BHP Billiton (ASX: BHP.ax) and Rio Tinto (ASX: RIO.ax) recently agreed price rises with Chinese steel producers of up to 96 percent for iron ore, back-dated to April.
Strong global demand and tight supplies also saw coal prices more than double, and Australia is the world's largest exporter of coal.
For the year to June, export prices were up 13.3 percent, with foods such as wheat boasting the biggest gain of 29 percent.
COPING WITH RICHES
The Reserve Bank of Australia (RBA) expects the terms of trade will rise by a record 20 percent or more this year, which in turn could lift national income by around 3 percent.
But this good fortune complicates life for the central bank, which has raised interest rates four times in the past year in an effort to cool the economy and restrain inflation.
Recent data suggests domestic demand has indeed slowed sharply, giving the RBA more confidence that inflation will ebb over time.
Still, it has cautioned that the windfall from trade could revive demand later in the year, suggesting interest rates will stay at 12-year highs of 7.25 percent for some time to come.
"From our perspective the terms of trade is a key factor arguing against speculation over rate cuts by year end," said Ong, at RBC.
Figures for consumer prices due out next week are expected to show core inflation rose a hefty 1.1 percent in the second quarter, on top of a 1.2 percent increase in the first quarter.
That would lift the annual rate to a 17-year high of 4.3 percent, well above the central bank's target of 2 to 3 percent.
Some of that would be due to record petrol prices. Friday's data showed import costs for fuel had increased by 16 percent in the second quarter and by 50 percent in the year to June.
Yet, elsewhere intense competition and the strength of the Australian dollar had led to falls in import prices for cars, office machinery and telecoms equipment.
"If anything, prices for consumer goods were softer than many expected," said Brian Redican, a senior economist at Macquarie.
"That suggests some possible downside risk to the consumer price report, though the outcome is still likely to be high." (Editing by James Thornhill)
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