Statement on Monetary Policy – May 2009 Box B: Recent Developments in Australia's Resource Exports

Global trade volumes have contracted rapidly since late 2008, with particularly sharp declines in manufactured goods trade. In contrast, Australia's exports have not declined as much, partly because Australia's resources exports – which comprise over half of the value of Australia's exports of goods and services – have shown only a relatively modest decline. This box examines the drivers of the recent strength in the volume of Australia's resource exports.

Australia's resource export volumes are estimated to have been broadly flat in the six months to March compared with the previous six months, with significant differences in the performance of different commodities. Exports of iron ore and coking coal volumes have fallen, reflecting the reduction in global steel demand for use in construction and manufactured goods. However, recent monthly data point to some reversal of this weakness, reflecting the pick-up in steel output in China in recent months, with steel production there now close to its mid-2008 peak (Graph B1). This recovery in Chinese production stands in marked contrast to the sharp fall in production in the rest of the world. It appears to have been driven by a nascent recovery in China's transport and construction sectors – indicators such as residential fixed asset investment have increased noticeably of late – as well as reported rebuilding of inventories by Chinese steel mills and traders. It is, however, too soon to tell how durable this pick-up in Chinese demand for bulk resources will prove to be. Regardless, Australia is a low-cost supplier of iron ore and coal – in terms of both the cost of production and for shipping to major markets in Asia – compared with other potential suppliers. This should provide some support for these commodity exports in the period ahead. Chinese production, for instance, is relatively high-cost and hence is less economic at lower iron ore and coal prices.

Other types of Australia's resource exports have shown considerably more strength of late (Table B1). Some bulk commodity exports are intensively used in the output of products that have not shown the same exceptional decline in global demand as for steel-based products. In particular, thermal coal exports (used in electricity production) have continued to expand, rising by 12 per cent in the six months to March compared with the previous six months. Australia's exports of other energy-related commodities have also continued to expand in recent quarters: with processing beginning at the North West Shelf's fifth processing train, LNG export volumes rose strongly in the December and March quarters, and oil export volumes have also picked up recently.