Terms of trade fade = May rate cut?

From the ANZ today:

Thermal coal prices gained, while coking coal prices declined to USD148/t. China coal import data showed thermal coal imports rose 25% to 16mt in March, with most of the gains in imports from Indonesia. Reports suggest Australia lost some of its market share to Indonesia as a supplier of high rank coal last month. China’s coking coal imports declined about 14% to 4.6mt in March, with most of the declines owing to a 28% drop in Australia’s exports to China. Mongolia’s exports improved slightly, also weighing on Australian FOB coking coal prices. In iron ore markets, prices were unchanged around USD138/t.

Here is the coking coal price, down 15% in two months and very close to its big dump low of late last year.

Coking coal represents some 12% of Australia’s terms of trade. Thermal coal another 7% and its contracts recently fell 17%. Gold is another 5-7% or so and it recently fell 15%. Iron ore is almost 25% of the ToT and has fallen 15% from February highs.

In short, on the back of the envelope the past two months has seen over 50 % of Australia’s terms of trade have been hit by about 10%.

There are lags on contract pricing here that will spread this out but a 5% fall in the terms of trade is not small bikkies and beyond the March QTR will not help profits, government receipts, national income or anything else in the economy. It effectively wipes out the bulk commodity bounce we enjoyed after last September’s fall and in the circumstances of a looming mining bust, it could be a rate cut trigger sooner rather than later.

If not May, June’s got to be live.

David Llewellyn-Smith
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  1. So we start to lose this ridiculous advantage of high commodity prices and suddenly we are in crisis mode?

    Firstly, punish politicians for squandering everything. Then the voters must suffer for voting those people in.

  2. “..a rate cut trigger sooner rather than later. If not May, June’s got to be live.”…unless…the ToT un-nerves the A$ first. That’s my suggestion. The RBA have sensibly resisted the urge to intervene in the Aussie, and now, with a trade correction may be needed to temper any route of the A$ – <0.85 is better, but not overnight! I guess we'll all have to see what breaks down first….

      • The problem may be that interest rate rises will have little effect on inflation that is driven by the effect of the ToT on import prices. The inflation would be substantial if the sort of correction to the $A you are talking about happens. ToT changes by 15% plus over (say) 18 months = 10% pa change in 40% of the CPI basket. With inflation in non-tradables routinely running at 3%+, that implies inflation going to 5.8%. That would take quite a hike in interest rates to pull back. Likely kill the economy stone dead.

        So much for a low inflation economy.

        • Absolutely Alex! The low inflation economy is, and has been, BS!
          We’ll get higher than 5.8%! Firstly FOB prices ex China are rising as well so your tradables will be somewhat higher than just the CPI increase.
          Second we will get a feedback of tradable inflation into non-tradable as the powerful make their grab. The old self-reinforcing loop sets in.
          That’s how inflation gets out of hand.

        • Unless the FED and other developed market centrals banks reach some accord and simultaneously stop QE, it’s hard to imagine the AUD falling that much without some severe economic shock and subsequent impact to growth. Which presumably has a negative impact on employment and an increase in spare capacity leading to non-tradeables inflation moderating…
          I realise this is all pretty obvious but there are two sides to a coin…

          • Carry trade has been a big “positive” pressure for the AUD, too, and with AUD fiat prospects dwindling and the benefits of the carry trade lessened vs oher options, it would not be unreasonable to expect that the AUD would drop substantially despite the same amount of QE occurring.

            My 2c

  3. Interesting that we received a .2% increase on our Term Deposit rate yesterday as against 3 months ago. And the 3 month was lower than the 6 month.

    Suggests that Janet may be on the money. Can’t wait!!!!

  4. Mainstream media is catching on and getting worried. I guess I’ll start stocking my bunker