The price boom in commodity markets, spurred on by demand from China, pushed Australian export earnings drastically higher in 2008. The December quarter of 2008 marked the peak in export earnings. Contract prices were still high, and the drop in demand from slowing world growth was offset by the depreciation of the Australian dollar in September. However, high prices for Australian exports pushed volumes lower in the September and December quarters 0f 2008 as world demand began to wane.
Export earnings shrank sharply in the March quarter of 2009, as demand decreased further. International companies cut back inventories in anticipation of lower demand in the future. However, export volumes increased for the quarter as China bought Australian commodities at low prices, anticipating higher prices in the future.
Exports and their earnings are expected to fall in the June quarter of 2009 as many commodity price contracts will be settled substantially lower for the 2009-10 Japanese financial year (April to March). Exports to China are not expected to continue to record the level of growth of the March quarter, while demand from other countries continues to decline.
Export volumes are forecast to continue to fall over the first half of 2009-10, albeit at a slower rate than in the June quarter, before picking up in 2010-11 as stronger world economic growth in 2010-11 increases demand for Australian exports. These factors will result in a 2.3% reduction in exports in 2009-10, before recording moderate growth in 2010-11.
In line with international trends, Australian businesses have aggressively cut inventories in expectation of lower future demand. Combined with lower exchange rates and a subdued economy, imports contracted sharply in the March quarter of 2009 and are expected to continue to do so in the June quarter, although at a slower rate. Strong appreciation of the Australian dollar over the June quarter combined with higher consumption expenditure, in response to government stimulus handouts, are expected to partly alleviate the drop in imports.
An appreciating Australian dollar in 2009-10 will encourage demand in the second half of the year. However, this will not be sufficient to overcome prior reductions, and imports are forecast to fall by 7.6% for the year. Growth will accelerate over the next few years as the Australian dollar continues to increase and demand conditions improve.
The price of crude oil soared to record highs in 2008, before plummeting as the credit crunch forced cash-strapped hedge funds to de-leverage. The price continued to decline as world economic activity slowed, resulting in lower demand for oil. The price has since risen from its minimum but is expected to remain subdued over the remainder of 2009.
A key factor in determining the price over 2009 will be the extent of the global recession. Lower world demand will continue to place downward pressure on the price; however, thus far, weak demand has been offset by OPEC production cuts, and the price has risen as a result.
From the second half of 2009, demand for crude oil is expected to begin to increase once more, albeit slowly at first. As the world economy begins to recover and the seemingly insatiable energy appetites of China and India return, so will the demand for oil. In a limited supply environment, this will push prices back up towards $100 a barrel over the next few years. Restricted investment in the current environment of low oil prices and limited capital could place more pressure on the price in the next couple of years as demand returns. In a tighter market, concerns about supply from the Middle East, Venezuela, Nigeria, and other oil-producing nations are expected to result in a risk premium pushing the price higher.
After rising sharply over the past few years, as soaring demand from China and strong domestic construction activity pushed input prices to record highs, iron and steel prices fell in the March quarter of 2009. Meanwhile, global demand crawled to a halt and steel stockpiles built up. Prices are expected to continue to fall during 2009 as construction markets remain stagnant around the world, constraining demand for industry products.
Price increases in 2008 were largely the result of soaring international iron-ore and coal prices due to supply constraints and heavy demand. IBISWorld estimates that new contract prices will fall by between 30% and 60% (depending on the commodity and grade), placing significant downward pressure on domestic prices. The weak Australian dollar, compared with mid-2008 values, should alleviate some of the impact on domestic prices by increasing export returns. Prices are not forecast to trend upwards until the June quarter of 2010, by which stage demand conditions are expected to begin recovering.
This article is an extract by a report by IBISWorld, Industry Winners and Losers of the Global Financial Crisis. To download the full report, click here.
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
