Australia | Apr 24 2006
China is the culprit accused of causing soaring commodity prices. As a commodity country, resources stock prices in Australia have been going through the roof. But if this is meant to be a mining, or commodity, boom, why don’t the numbers support the view?
"While China’s larger presence in the global economy, the increase in Australian exports to China, and increases in the prices of Australian exports of coal, iron ore and metals, have been helpful they have not been important to Australia’s economic performance in the first decade of the 21st century. They may well matter a great deal in the next five years, but they haven’t mattered much in the last five."
So says John Edwards, chief economist with HSBC. The reason, says Edwards, is that Australia’s economic growth is actually well below trend and has been for several years. The average for the 14 years to December 2005 is 3.7%, yet the years to December 2004 and 2005 both registered only 3% growth. Moreover, within that modest growth exports have made but a minor contribution.
Exports have actually grown less than the economy as a whole. In 2004 and 2005, notes Edwards, exports only accounted for one seventh of total economic growth, and in the four years to the end of 2005, only accounted for one twelfth of output growth.
The volume of Australian exports all up in 2005 was a mere 6% higher than in 2000. Prolonged drought, a stronger Aussie, and some mine closures saw to this. In 2005, notes Edwards, the entire mining industry only accounted for – wait for it – 0.1% more of Australia’s 2.7% total output growth. Boom?
There is no doubt Australia’s relationship with China has changed significantly. In 2000, China took in 5% of our exported goods and in 2005 it took in 12%. This now makes China Australia’s second biggest export market, after Japan. But despite the increase, Australia’s dependence on China is fairly insubstantial, as Edwards notes.
Australian exports to China accounted for 2% of the Australian GDP, which is far less than the percentages of some of China’s other trading partners such as Korea, Japan, Taiwan, or indeed the rest of South East Asia. What has really boomed is the amount of Chinese exports to Australia.
Where the numbers may lead to misconception is in the value of Australia’s commodities exports to China. Metal exports (the bulk of which is iron ore) have grown by 17% of total exports in 2005 compared to 12% in 2000, and coal by 16% compared to 8%. Soaring prices have ensured that the value of these exports in 2005 increased by 44% for metals and 62% for coal.
Yet, as Edwards points out, the actual tonnage of metals exported increased by only 10%, and coal by 4%. These numbers don’t even look impressive within the last quarter century.
Boom schmoom. It is important to note, however, that these unimpressive tonnage numbers also reflect capacity shortfalls as well as infrastructure incapacity both here and in China – road, rail, ports, ships. More metal and coal might have been exported if only the means existed to get the stuff out and over there.
At least China’s growth has resulted in an improved terms of trade on the Australian side, to the tune of 37% between 2000 and 2005. However, Edwards points out any benefit derived from this improvement has been overshadowed by falling house prices and resultant weakening in household spending.
If there really is no boom, then what is there to justify such inflated prices for Australian resources stocks? Should we be afraid?
The answer to that is to consider that metal prices are by their very nature volatile, and a few swings and roundabouts will appear along the way. All analysts are expecting the supply side to eventually catch up, both in terms of new sources, new or old mines coming on-line or back on-line, and infrastructure bottlenecks being overcome. It is this that will ultimately relieve pressure on commodity prices.
But if the likes of BHP Billiton (BHP) and Rio Tinto (RIO) can actually sell more iron ore or coal at lower prices then the value equation should not be greatly affected. Hence stock prices need not fall if commodity prices do (except perhaps on undue panic) provided volumes can be increased at a balancing rate.
For there really to be a collapse you would need to see demand evaporate, and no one’s expecting that to happen in the foreseeable future.