Trade surplus narrows as commodity prices drop

December 12, 2011

The monthly trade surplus narrowed more than expected in October to its smallest since March as demand for commodities from China faltered.

The trade surplus narrowed to $1.59 billion from $2.56 billion in September, according to the Australian Bureau of Statistics. Economists polled by Bloomberg expected the trade surplus to fall to $2 billion.

"It could be the first sign of a weakness for demand for commodities from China but a lot will depend on how Europe evolves," said St George Bank chief economist Besa Deda. "We think the weaker commodities prices and the relative strength of the Aussie dollar, combined with strong demand for capital goods imports probably means we've seen the peak of the surplus."

The ABS said iron ore fines exports to China, on a recorded trade basis, fell $110 million or 3 per cent in October. Volumes for lump iron ores were up 6 per cent but prices fell 9 per cent.

The fears of a steep recession in Europe have weakened demand for Chinese exports which in turn is hurting Australian sales into China.

The Australian dollar fell after the release of the trade figures and a separate report on housing finance, losing about one quarter of a US cents to about $US1.017 in recent trade.

China effect

Ms Deda noted that China recently began easing policy in response to the impact of the European debt crisis and economic slowdown in China. Europe is China's biggest export market.

Rural goods, seasonally adjusted, rose 2 per cent to $3 billion in October.

Ms Deda said St George is still forecasting healthy trade surpluses to come, especially with Queensland's coal industry's production improving after the floods at the beginning of the year however the peak of the surplus has probably passed.

In seasonally adjusted terms, non-rural goods exports edged up $14 million to $19 billion in October, helped by mineral fuels which rose $144 million, or 7 per cent in the month.

Manufactured goods exports, however, fell $84 million, or 6 per cent, while coal, coke and briquettes shipments abroard fell $75 million, or 2 per cent.

Goods and services imports rose 2 per cent, or $605 million, to $25.7 billion in October, with capital goods rising $60 million or 1 per cent.

"We had a big rise in capital goods imports coming through that is reflecting the strong business investment boom," Ms Deda said.

Import boost

Moody's Economy.com analyst Matthew Circosta said demand for exports is weakening and that the trade surplus would continue to narrow.

"Softer commodity prices are flowing through to lower export receipts, while strong business investment and household consumption are boosting imports."

"Recent interest rate cuts will support domestic demand, which along with the rampant mining boom, will continue lifting the import bill and narrow the trade surplus," said Mr Circosta.

HSBC chief economist Paul Bloxham said rising imports are consistent with the solid domestic demand in the Australian economy.

"Some (demand) is leaking offshore, given the elevated level of the Aussie dollar," he said.

Mr Bloxham said the leakage is not just around online retail shopping but investment in the mining boom, which includes the surge in equipment imports.

Lumps, fines, coal

In October the price of iron ore plunged by 30 per cent, to about $US120 a tonne, as Chinese steel mills slowed production. Iron ore prices have since recovered to be about $US140 a tonne.

Exports of the premium lump iron ore to China fell $23 million, or 2 per cent, with volumes rising 8 per cent in the month while prices fell 10 per cent.

Hard coking coal exports to China fell 19 per cent, in the month, but rose 9 per cent to Japan and 11 per cent to India. Overall, hard coking coal exports fell 4 per cent, $79 million, in the month.

Semi-soft coal exports to China sank 50 per cent in October, by $107 million, with volumes down 47 per cent and prices 6 per cent lower, the ABS said.

Thermal coal exports to China rose $47 million, or 25 per cent, with volumes up 23 per cent, and prices up 1 per cent.

Sourced smh.com.au