Will Australia face a commodities price crisis?

4th September 2012

Earlier this morning the Reserve Bank of Australia (RBA) published the results of its latest deliberations and it concluded the following:

"the Board decided to leave the cash rate unchanged at 3.50 per cent"

That in these times qualifies as quite a high official interest-rate! And it may make the Australian dollar a candidate for using (buying) as part of the carry trade to pick-up this 3.5%. There are of course plenty of currencies that can take the other side of the trade and be borrowed in (sold) as so many have zero or near zero interest-rates.

Sticking to the Australian economy for now the RBA also stated this:

"In Australia, most indicators available for this meeting suggest growth has been running close to trend, led by very large increases in capital spending in the resources sector. Consumption growth was also quite firm in the first half of the year, though some of that strength was temporary."

On the face of it again this looks a good performance especially compared to much of the rest of the world. Indeed if we add in the inflation performance this begins to get about as good as any advanced economy gets these days:

"Inflation remains low, with underlying measures near 2 per cent over the year to June, and headline CPI inflation lower than that…… The Bank's assessment is that inflation will be consistent with the target over the next one to two years."

What about the commodity sector?

If we put aside for one moment the RBA's use of the concept of trend growth -proof in itself that Australia has escaped many of the effects of the credit crunch era so far!- we see that she saw an expansion in her commodity sector in the first part of 2012. This does not entirely fit with this other part of her statement:

"Current assessments are that global GDP will grow at no more than average pace in 2012, with risks to the outlook still on the downside."

Expanding into a possible slow down has its own dangers and regular readers of this blog will be aware that one of Australia's main customers China is slowing down. Only this weekend we received news that even the official Chinese purchasing managers index is now showing a  contraction. As a quarter of Australia's exports or to put it another way 5% of her economic output goes to China this is obviously quite a concern. And those who have followed Japan's slow down will see further worries in the fact that the Yen is another 13% of the RBA's trade-weighted index.

Commodity Prices have fallen recently

Only yesterday the RBA had updated us how its index of commodity prices had performed:

"Preliminary estimates for August indicate that the index fell by 3 per cent (on a monthly average basis) in SDR terms, after rising by 0.9 per cent in July (revised)……. In Australian dollar terms, the index fell by 4.3 per cent in August."

By SDR they mean Special Drawing Rights which is the "currency" of the International Monetary Fund. And if we look for some context we see that this index has been falling for  a while now:

"Over the past year, the index has fallen by 13.7 per cent in SDR terms. Much of this fall has been due to declines in the prices of coking coal and iron ore. The index has fallen by 18.5 per cent in Australian dollar terms over the past year."

I have left the reference to the fall in the prices of coking coal and iron ore in because that coincides with reports in China of stockpiles of these two raw materials building up. But before I look at the likely consequences of this let us take a look at the commodity price boom itself which has fed Australia's economy.

Continue reading…


More on Mindful Money:

Commodities Outlook: ‘Focus on the long term’

Oil – The next revolution?

How China drives the Australian iron ore boom (and bust)

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