Australia’s terms-of-trade to record biggest ever rise

The Australian Bureau of Statistics (ABS) has released its International Trade Price Indexes for the June quarter of 2021, which revealed that export prices soared by 13.2% over the quarter and by 26.0% through the year.

By contrast, the import price index rose by 1.9% this quarter but fell 2.5% through the year.

Surging iron ore, coal and gas prices drove the rise in export prices:

  • Metalliferous ores and metal scrap (+18.5%), driven by the demand for iron ore from China and constrained global supply.
  • Coal, coke and briquettes (+15.6%), reflecting the demand for thermal coal for household power production in Asia.
  • Gas, natural and manufactured (+14.6%), due to the oil-linked contracts capturing the continued rise in oil prices in early 2021.

The change in the import/export price index gives a good proxy for Australia’s terms-of-trade (ToT). As shown in the next chart, Australia’s ToT is looking at a circa 11% increase in the June quarter and a 29% increase through the year:

Terms-of-trade

Biggest ever rise!

If so, Australia’s ToT could hit its highest ever level in Q2 2021 when the national accounts are released in early September.

The importance of this cannot be understated. The ToT measures the average price level of exports to the average price level of imports. Thus, when the ToT rises a given quantity of exports can pay for a larger quantity of imports, effectively granting the nation a pay rise.

The ToT, therefore, is a key determinant of national income, as well as a key driver of government finances via company tax receipts.

Much like they did between 2009 and 2012, the federal budget and company profits will ride the iron ore boom. The main difference this time around is that the price boom is not being matched by increased mining investment, which means there will be little spillover into jobs and wages. It is largely a profitless boom for Australian workers.

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