Australia posted its worst monthly trade deficit in almost half a century in April. If you needed another sign that Australia’s economy is sleepwalking into a recession, you just got it.
The trade deficit — measuring total export against total imports — came in at a staggering $3.9 billion. Measured against March, exports fell by 6%. That equates to a drop of almost $1.56 billion.
Meanwhile, imports surged by $1.1 billion in April compared to March.
So how did we manage to post a record trade deficit? It may come as no surprise that the large deficit was the result of freefalling commodity export revenues.
Coal exports slumped by 22% to $859 million during April. This drop was blamed on lower than expected volume exports, resulting from port closures. The actual price of coal only marginally fell. But there may be some good news on the horizon for coal. Exports are expected to bounce back in May, with these ports having since reopened.
In contrast, iron ore exports suffered as a result of the low prices dogging the industry. Total shipments dropped 13%, or $808 million for the month.
The spot price of the mineral was still trading well below US$60 a tonne in April. Yet there will be some reprieve for iron ore when the May figures come out. Prices have risen by roughly 30% since April. That should help iron ore revenues recover somewhat in May.
Despite expected upswings in May, April’s figures make for grim reading. As one JP Morgan analyst described it, the trade data is nothing short of a disaster. If we compare it to analyst predictions leading up the announcement, the deficit blew out by $1.5 billion. And it came in at almost three times the $1.23 billion trade deficit reported for March.
What this tells us is that the economy isn’t quite as healthy as we’re led to believe. Wednesday’s 0.9% GDP growth figures for the first quarter were championed as a sign that the good times were coming back. They now look a lot less cheerful.
Knowing what we now know about April’s trade deficit, we have no hope of repeating the first quarter performance again this year. Even with the slight recovery in iron ore prices since March, it’s difficult to see how the next quarter results will be anything other than a damp squib.
The trade data is yet another sign that China’s lagging growth is weighing down heavily on the Aussie economy. We’re faced with the reality that economic growth peaked in the first quarter. With the prospects for a major recovery in iron ore appearing slim, that trade deficit isn’t likely to improve in the next six months.
Where to next for commodity prices?
Coal prices reached their peak in 2008, before settling between US$50–60 a tonne. Unlike coal, iron ore’s price bust is more recent. Iron ore was still selling for US$180 a tonne in 2011, before nosediving to its present level of US$63 a tonne.
The problem for iron ore is that it still has plenty of scope for further decline. Swiss investment bank UBS say that prices could fall to US$45 by the end of the year. If they’re right, April’s iron ore export revenues could look favourable by comparison. Where does that leave iron ore producers?
They’ll continue to feel the pain as profit margins get carved up amid high global supply and low prices.
But as iron ore profit margins drop, other commodities could be on the verge of leading a new export boom. Investment guru Rick Rule believes there are three commodities which are set to explode in the next few years, starting a new cycle of commodity driven growth.
Rick is the founder of Sprott Global Resource Investments — one of the world’s leading resource investment firms.
Rick’s witnessed several cycles come and go in his 40 year career. His experience has given him a knack for spotting companies that are set to flourish before the new commodity cycle begins to boom.
That’s why he’s put together a free video for you. In it, Rick reveals his top three commodities you should be in right now. He’ll show you how to identify the right companies to boost your portfolio as the new cycle gains pace. To find out how to watch the special report, click here.
Contributor, The Daily Reckoning