Aussie terms of trade rose in 1Q, but best to come

Aussie terms of trade rose in 1Q, but the best is yet to come

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Australian export prices jumped 3.8%q/q in 1Q10, and import prices were essentially flat, pushing the terms of trade 3.5% higher over the quarter. The base effects from the mid-crisis plummet in commodity prices, which have been depressing annual growth in the terms of trade for several quarters, are fading, but still present. The terms of trade index is still 16% below the level seen in 1Q09.

Export prices rose slightly less than expected over the quarter, up 3.8%q/q (J.P. Morgan 4.6%, consensus 3.9%), but are still well down over the year, 27% below the level registered in 1Q09. The improvement over the quarter owed mainly to higher prices for food and live animals (+6.3%), crude materials (+5.9%), and manufactured goods classified by material (+7.2%). Further in the detail, the ABS reported rises in prices received for metalliferous ores and metal scrap (+5.7%), non-ferrous metals (+7.4%), petroleum and products (+8.4%), gas (+5.4%), and dairy products (+15.8%). The increases in the metals and materials categories were in line with stronger aluminum and copper prices in 1Q. The strength in rural export prices, however, was a surprise. Depressing the export price index were weaker prices for coal, coke and briquettes (-1.6%).

Import prices surprised on the upside, rising 0.3%q/q (J.P. Morgan -1.2%, consensus -1.4%) With AUD remaining elevated, the increase was owing to higher foreign currency prices for specialized machinery (+2.9%), and vegetables and fruit (12.1%). The benefit of continued AUD appreciation over the year was evident, with import prices down 13%oya, though stubbornly elevated prices for petrol and related materials (+19%) limited this improvement.

Over 2010, changes to the contract negotiation protocol for iron ore, along with higher spot prices for coal, will pull export prices even higher yet. We expect a near 12%q/q jump in the terms of trade in the second quarter, as contracts are settled at elevated spot prices. The bullish outcomes for future export earnings, and hence national income, from these shifts in contract pricing have not escaped policymakers. Indeed, the bright outlook for the terms of trade, and investment in the resources sector, were cited in RBA minutes this week as the major risk in delaying further hikes to the cash rate at the April meeting. With the RBA hiking at five of the last six meetings, officials clearly are concerned about the inflationary repercussions of the spike in national income, and wage pressures in the resources sector that will follow from the terms of trade boom.

ENDS

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