Australia's terms of trade makes all time high

Image: Tom Fisk

Ooft, that’s a big print

Perhaps the highest print ever.

I’m talking about Australian terms of trade - an index which shows the relativity between Australia’s export and import prices.

It’s calculated as the ratio of export prices to import prices (not volumes).

An increase in the index is favourable and implies Australia is receiving relatively more for its exports and is better off.

If it decreases, Australia is receiving relatively less, and is worse off.

And, here’s the print showing the peak (so far) in Q3 of 2021 (red circle).

As a country with a tremendous endowment of natural resources, it’s no surprise that our terms increase during commodities booms, which typically result in price increases for our exports.

With that also comes investment and additional supply.

Once that supply is in place and the boom (demand) starts to moderate/dissipate, prices and terms of trade come down.

This fall and normalisation occured after the Korean War commodities boom and the China urbanisation commodities boom, as per the chart.

Back to the future, and Australian export prices have been particularly strong of late due to continuing global demand for coal, LNG and meat products as well as energy transition and electronics minerals (copper, nickel, manganese, lithium, etc).

And with global cupboards almost out of every major Australian seaborne commodity due to COVID supply chain disruptions and under-investment in transitional commodities, this may continue for some time, all other things being equal.

But it also means import prices are likely to get steeper until product supply blockages are resolved.

Mean reversion?

The question now is how long it will take for the terms of trade to normalise like it has on past occasions, after wars.

And it’s fair to say COVID has been a war-like event in terms of its effect on supply chains.

The peak of our terms appears to have occured in Q3 of 2021.

In Q4, we see some evidence of weakening given export prices grew at a slower 3.5% than import prices which grew at 5.3%.

A key factor that would push up the denominator (import price index) and put downward pressure on the terms would be any material increases in the cost of oil imports.

And with oil nearing $100 per barrel, this may occur.

But it’s difficult to predict whether this move would be greater than any export price moves.

That will depend on the speed of global demand/supply chain recovery, competitive responses from OPEC and unconventional oil producers in North American, how the Russia/Ukraine scenario plays out and the passage of additional fiscal spending initiatives in the northern hemisphere.

Above my pay grade!

For the moment, our terms of trade are very healthy and that means we can buy more units of imported goods for each unit of exports sold and that’s a pretty important thing given our import requirements amidst the backdrop of broken supply chains.

We also don’t have runaway inflation, and while our pandemic debt is uncomfortably high at over $600 billion, global electrification/decarbonisation initiatives (when they occur) and the demand that will bring for our natural endowment should be a huge positive for Australia, going forward.

Stay tuned.

Mike

Next Level Corporate Advisory is a leading M&A and capital markets advisor with a 20 year track record of delivering the highest quality of independent financial advice as well as strategic transactions to help our clients level-up.

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Michael Ganon#markets, #equities, #stonks, #finance, #economics, #ethereum, #inflation, #deflation, #transient, #nft, #bonds, #gold, #globalmarkets, #globaleconomy, #qe, #qeinfinity, #economy, #interestrates, #business, #trade, #transformation, #strategy, #ceos, #directors, #founders, #cfos, #c-suite, #currencies, #construction, #mining, #renewables, #technology, #leadership, #india, #china, #australia, #perthbusiness, #education, #research, #uk, #gdpgrowth, #retail, #businessowners, #future, #brexit, #nextlevelcorporate, #mikeganon, #community, #tradewar, #America, #covid-19, #bitcoin, # perthbusiness, #populism