Australian Trade Deficit Grows for 75th Consecutive Month

What a strange economy Australia has. A country in the midst of a record boom still manages to run a trade deficit. Yesterday, the Australian Bureau of Statistics reported that the February trade deficit blew out by 30%, from a revised $2.59 billion in January to $3.29 billion in February.

Exports fell by 4%, or about $18.2 billion in the month. The big laggards were metal ores, minerals, and coal. Metal ores and mineral exports fell by 18% in the month, or $624 million. Coal exports fell by 16%, or $281 million. Coal and metal ores weren't exactly being lazy. You can blame the weather (flooding) and continued bottlenecks in export infrastructure.

There is a simple explanation for Australia's trade deficit: the country really doesn't make much. How else can you explain something that's been a regular feature of the economic landscape for the past 75 months? From our quick scan of the figures at the ABS, the last time the country ran a monthly trade surplus was in October of 2001.

Since then, of course, exports have ramped up with the resource boom. But as the Aussie dollar has strengthened and the U.S. dollar weakened, export profits have been tempered by the fact that Aussie exports face rising costs in local currency terms but get paid in weaker U.S. dollar prices.

The upside is that commodity prices have been rising. Some of this is dollar weakness. Some of it is too little supply. And much of it is growing demand. This all makes for rising prices.

And while we're on the subject of rising prices, let's hear it for iron ore, thermal coal, and coking coal!

The standoff with China over the iron ore contract is partially responsible for the $800 million fall off in trade revenue. But that revenue is about to soar again with a series of agreements on the price for steel making ingredients. How can the steel producers still make a profit with iron ore and coking coal prices rising so much? Hold that thought.

The Financial Review reported yesterday that BHP is close to sealing the deal with South Korean steel maker Posco for a coking coal price of US$300 in 2008-2009. That is up from US$97 last year. That's a nice little gain. Coking coal in the spot market is already going for around US$350, according to the Fin. Australia exports 68% of the world's seaborne coking coal.

Iron ore, you say? We covered it earlier this week. But we reckon the contract price will rise by at least 75% before June 30th. And even thermal coal for power plants is expected to at least double from its current contract price of US$56 per tonne.

Combined, the rise in coal prices should boost export income from by $35 billion to $56 billion. That will be handy to have. Still, don't expect a huge improvement in the trade deficit. If you look closely at the breakdown in the import figures, there's a lot Australians import from abroad.

The main three categories (according to the ABS) are consumption goods, capital goods, and intermediate goods. This includes things like textiles, electronics, toys, books, leisure items (in the consumption goods category) and things like civil aircraft parts, telecommunications equipment and industrial machinery (capital goods), as well as well as fuels, lubricants, papers, plastics and spare parts (intermediate goods).

If you don't make it here you have to buy it from somewhere, or have it not at all. Australia does produce some things. But for a rich Western economy, its production-and lets remember this a country of 20 million people-is largely concentrated in raw materials and agricultural goods, not finished manufactured products.

The strong dollar eases the pain of imports a bit, especially since many of the imports are cheap and come from Asia. But it's generally true that profit margins are greater in finished goods than raw materials. Australia's had its bacon saved in this respect because resource prices have been rising by so much and so quickly.

Makes you wonder what will happen in a generation or two (perhaps less), when the resource profit growth is gone and the country's productive capacity hasn't been diversified. Expect to see a lot of service jobs at low wages.

We were a bit gloomy yesterday about Australia's prospects for decreasing it reliance in imported refined fuels. A larger question might be whether the country can increase its net oil production. Consumption is growing faster than production. Like every major country in the world, Australia would like to find more domestic oil.

The good thing about finding oil is that geologists can tell you what kind of geologic formations bear oil. The bad thing about finding oil is that its getting more expensive, mostly because companies are having to look further and further off shore, just to find reserves to replace current production (not to ad to reserves.) The government is getting busy.

"The Australian government invited bids for 35 oil and gas exploration permits in five petroleum basins off the northwest and southwest coasts as it seeks to address a rising deficit in crude-oil supply," reports Angela Macdonald-Smith in Bloomberg. "Australian spending on exploration jumped 57 percent last year to a record $2.66 billion even as the number of wells drilled fell, as equipment and labor shortages drove up costs. Explorers need to boost work in frontier areas to avoid a A$28 billion petroleum trade deficit within a decade."

The permits on offer are for exploration in the Browse, Bonaparte, and Canarvon and Perth Basins. As you can see from the picture below, courtesy of the Department of Energy, Resources, and Tourism, all this years offshore exploration permits are in the West. Proceeding clockwise, the basins are Perth, Carnarvon, Roebuck, Browse, and Bonaparte.

Source: Department of Resources, Energy, and Tourism

There are a ton of off-shore petroleum development projects in WA from last year. We're also keeping our eye on off-shore natural gas in the Otway and Cooper Basins in South Australia.

Dan Denning
The Daily Reckoning Australia

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