Yahoo Finance Australia’s commodities boom: Is it about to end?
One key part of the Australian economy is its reliance on commodities for its export receipts.
Indeed, the total value of exports accounts for around 25 per cent of Australia’s economic output – Gross Domestic Product (GDP) in other words.
The vast bulk of that, around three-quarters, is what can be broadly defined as commodities.
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For Australia, the top commodity exports are iron ore, oil and gas, coal and gold.
Also important, but significantly smaller than the mining commodities in dollar terms, are from the agricultural sectors – meat and grains among others.
One issue with such a heavy reliance on commodities is they, unlike many manufactured goods or services, tend to have volatile prices and demand for those goods internationally can ebb and flow with the broader business cycle.
At the moment, commodity prices are very strong.
The following chart shows the Reserve Bank of Australia index of commodity prices. It is based on the composition of Australia’s commodity exports and its composition is updated annually to reflect the changing weights of those exports.
The striking feature of the chart is the surge in prices around 2003 and 2004, a period when Chinese industrial production and materials for an infrastructure boom took off. Or rather, how low commodity prices were prior to 2000.
Between 2003 and 2008, commodity prices trebled in an extraordinary boom. There was a short-lived and, on reflection, moderate dip around the time of the global financial crisis in 2008 to 2010 before a further sharp jump after that.
There was a relatively sharp fall through to 2016, as the Chinese economy slowed and the results of a global mining boom saw the supply of commodities surge. Prices then resumed their upward trend as the global economy expanded.
The economic turmoil associated with the COVID pandemic has had a minimal impact on commodities. Indeed, the last year has seen a surge in prices to just below record highs as the impact of economic policy stimulus - including zero interest rates, money printing and massive budget deficits around the world - fuelled demand.
The level of Australian commodity prices today is more than three times higher than around 2000. This has, and is, providing a massive boost to Australian incomes and the bottom-line strength of the economy.
And it is not just the price of these commodities that have been booming.
The quantity, or volumes, of commodity exports has also been strong, particular to China where economic growth remains solidly positive despite the recent moderation in its economy.
This has translated to Australia running huge surpluses on its international trade account. In other words, the revenue from exports is significantly above the cost of imports. Indeed, the international trade surplus has been hovering around $5 billion to $10 billion per month since the end of 2018.
This surge in the international accounts for Australia is one reason our economy has done relatively well in the past year and is why inflation pressures are building.
High commodity prices are, by definition, inflationary. Higher oil prices will feed into transport costs, which will inevitably be recouped by the wholesalers and retailer paying those higher prices.
They will also impact the manufacturing costs as steel, copper, timber and other prices are trending up.
While we as consumers and business owners may not like paying more for these sorts of goods as commodity prices rise - note the recent surge in petrol prices by way of example - the Australian economy unambiguously benefits from high commodity prices.
A commodity price boom underpins strength in business investment in mining, quite clearly, with secondary benefits for those industries and businesses who support the mining sector.
Employment increases, tax revenue is boosted from highly profitable mining companies and the share price of mining companies will be buoyant, supporting the superannuation returns for workers and many superannuated retirees.
There are a few dark clouds on the horizon.
There is a growing risk building that the commodity price cycle will start to edge lower.
Global central banks are in the process of ending their money printing - or quantitative easing - and official interest rates are also on the march higher.
These actions are designed to cool inflation pressures which, when successful, will likely have a negative impact on commodity prices.
It is also important to note that global output of most mineral commodities is also increasing as mining companies work to take advantage of the current favourable conditions.
While a global commodity price bust remains unlikely – the global economy is still growing after all - a period where commodity prices edge lower seems likely, as economic policy is tightened around the world.
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