Higher A$ affects commodity export earnings

By Paula Wallace

This updated forecast, from the Australian Bureau of Agricultural and Resource Economics (ABARE), represents a downward revision of about $1 billion from its forecast in June.
“At a forecast $123 billion, minerals and energy export earnings in 2009-10 will be the second highest on record,” said Dr Terry Sheales, deputy executive director of ABARE.
The value of energy exports is forecast to fall by 36 per cent to around $50 billion in 2009-10. For metals and other minerals, export earnings are forecast to decline by 12 per cent to around $74 billion over the same period.
Australian mine production in 2009-10 is forecast to increase by 4.6 per cent, being underpinned by expected higher production of iron ore (18 per cent), gold (15 per cent), copper (9 per cent), thermal and metallurgical coal (8 per cent and 4 per cent respectively), liquefied natural gas (7 per cent) and uranium (2 per cent).
ABARE notes that after depreciating significantly in the second half of 2008, the Australian dollar has appreciated markedly since March 2009, both against the US dollar and on a trade weighted basis.
Judging by its historical movements, the Australian dollar has a tendency to appreciate strongly in the beginning phase of world economic recovery, said ABARE’s Australian Commodities report. Its forecasts assume an average price for the Australian Dollar of US83 cents and TWI 66 – this compares with an average of US75 cents and TWI 60 in 2008-09.
“Therefore, there is a distinct possibility the Australian dollar could remain at its current level or even appreciate further against the US dollar in the short term,” said the report.
In recent months, tentative signs have emerged that world economic activity may have stabilised, with international trade and global industrial production expanding modestly following large declines earlier in the year.
The revival of economic growth in China has provided support to demand for exports from other Asian economies, including Japan, the Republic of Korea and several South-East Asian countries.
China’s real gross domestic product grew at a year on year rate of 7.9 per cent in the June quarter 2009, compared with growth of 6.8 per cent in the March quarter 2009 and 6.1 per cent in the December quarter 2008.
ABARE said partial indicators released recently suggest activity in both manufacturing and nonmanufacturing sectors has improved in the USA. Spending on infrastructure projects, as part of the US Government’s US$787 billion fiscal stimulus package, has provided support for the construction sector.
However, consumer spending, which accounts for around 70 per cent of the US economy, remains subdued.
“Reflecting weak income growth and softening labour market conditions, there is a distinct possibility a major recovery in consumer spending will not occur until the second half of 2010,” said the report.
Economic activity has rebounded in both Japan and the Republic of Korea. In Japan, real gross domestic product expanded at an annualised rate of 2.3 per cent in the June quarter 2009; in the Republic of Korea, the same measure rose 2.6 per cent quarter on quarter.
Australia’s real gross domestic product rose 0.6 per cent in the June quarter after growing by 0.4 per cent in the March quarter.
“Economic growth in Australia is assumed to average around 0.5 per cent in 2009-10. This compares with growth of 1 per cent in 2008-09,” said the report.
Unit export returns for Australian mineral resources are forecast to fall by 27.1 per cent in 2009-10, following an estimated rise of 35 per cent in 2008-09.
“This largely reflects the effects of lower negotiated prices for coking coal, thermal coal and iron ore, offsetting higher world prices for gold and many metals,” said ABARE.
It noted falls in bulk commodity prices for JFY 2009: metallurgical coal, 57 per cent; thermal coal, 44 per cent; and iron ore, 33 per cent.
Mineral resources for which export earnings are forecast to rise, according to ABARE, include uranium, copper, gold, nickel, silver, tin and titanium.
The report also contained a cautionary note. It said that over the remainder of 2009 and 2010, three factors may combine to curb China’s import growth to some extent, compared with the first three quarters of 2009.
“If measures were taken to tighten credit availability in China, this has the potential to adversely affect commodity demand growth.
“Second, restocking of commodities has been an important driver of import demand in China. With China’s stocks of many commodities estimated at, or close to, capacity, the potential for restocking to further contribute significantly to commodity demand appears limited.”
Finally, ABARE noted that some mining and processing capacity that was shut down in late 2008 in China could restart, being encouraged by the recent upward movement in world commodity prices.