Australia’s export performance in 2015-16

13 Jan 2017

Tags

  • Mark Thirlwell
  • ASEAN
  • Australian Economy
  • Chinese Economy
  • International Trade
  • Japanese Economy
  • US Economy
  • Visitor Economy

Happy New Year, and welcome back to the Austrade economics blog.

To start things off, this post takes a (slightly belated) look at how Australia’s exports fared over the last financial year (2015-16 or FY2016)[1]. The short version of the story is that continued falls in the value of resource exports (particularly of iron ore, coal and oil) dragged down the total value of exports for a second consecutive year, with the drag from lower commodity prices only partially offset by another strong performance by services exports. But before looking at the numbers in more detail, it’s first useful to remind ourselves about some of the key variables that influenced the international environment facing exports and exporters.

To begin with the big picture, the international backdrop was a world economy where, once again, growth in international trade struggled to gain traction.

Growth in world trade volumes (goods and services), and IMF forecasts for world trade growth in 2016

Commodity prices were still falling at the start of FY2016, although by the time the financial year drew to a close, they were showing some signs of stabilising, suggesting that their long decline may have finally been drawing to a close. After finishing FY2015 at around US$62/t, the price of iron ore had fallen to below US$40/t by December 2015, but by the end of FY2016 it had partially recovered, pushing back up to over US$50/t. That wasn’t enough to prevent a fall in the value of our iron ore exports, but it did suggest that the worst of the price declines (and their impact on our trade performance) could be coming to an end.

Monthly iron ore price, and Monthly thermal coal price

Likewise, the Australian dollar was also showing some indications of a change in trend: after falling by about 19 per cent against the US dollar and by about 12 per cent on a trade weighted (TWI) basis over FY2015, in FY2016 the drop against the greenback was just four per cent and a decline in the TWI of only two per cent. That in turn meant that the real effective exchange rate (a broad measure of relative competitiveness) finished the year at roughly the same level as it had started it, indicating both that the competitive relief from the previous period of real depreciation was largely left in place, but also that the lift from a continued decline in the real rate had now been removed.

Nominal exchange rate, and Real effective exchange rate index

In this environment, the value of Australian goods and services exports posted their second consecutive annual decline, falling by about two per cent to A$312.3 billion.

Australia: Exports of goods and services, values and growth

That also meant another fall in the ratio of exports to GDP, which fell to below 19 per cent for the first time since FY2005 – although it’s also worth noting that this overall drop combined a decline in the ratio of goods exports to GDP with a small rise in the ratio of services exports to GDP.

Australia: Exports as a share of GDP

That divergence in export ratios reflects the fact that, while exports of goods declined in value terms (down by around 4.5 per cent) over 2015-16, exports of services delivered a third consecutive year of near double-digit growth, rising by nine per cent.

Australia: Export growth (value terms)

As my colleague Tim Quinn pointed out in this post at the end of last year, much of this robust services trade story reflected a strong performance by our Visitor Economy, which delivered combined exports of A$44.8 billion, up by more than eight per cent or by A$3.4 billion over the previous year.

Visitor Economy exports by sector, 2005-06 to 2015-16

Exports of total services were up by about A$5.5 billion, making them the strongest overall performer, with more modest positive dollar increases coming from exports of other goods (including gold), manufactures and food.

Despite falling in value by A$16.5 billion, however, minerals and resources continued to dominate Australia’s export mix in 2015-16, accounting for more than 40 per cent of total exports and driving the overall reported decline in export values[2].

Composition of Australian exports, 2015-16, and Change in value of exports by sector, 2015-16

By product, iron ore continued to be Australia’s largest export earner in FY2016, accounting for A$47.8 billion of exports, or more than 15 per cent of the total. That was down some A$6.8 billion (or 12 per cent) from FY2015, due to the impact of lower iron ore prices over the year. Softer prices for resources also saw sizeable declines in the value of exports of coal (down about A$3.3 billion) and crude petroleum (down about three billion dollars, or a decline of 36 per cent, with the fall in export values here also reflecting an ongoing output decline).

Top 15 exports of goods and services 2015-16, and Change in exports by leading product, 2015-16

Consistent with the strong Visitor Economy story mentioned above, exports of personal travel excluding education and exports of education-related travel both enjoyed sizeable dollar increases in FY2016. The biggest increase, however, came in the form of exports of gold, which were up A$3.1 billion – a rise of about 23 per cent – reflecting a combination of an increase in gold production and a strong rebound in gold prices during the first half of 2016[3].

In terms of the direction of trade, China continued to be Australia’s largest export market in 2015-16, accounting for 27.5 per cent of all exports of goods and services, or A$85.9 billion. After having fallen by more than 15 per cent in the previous financial year, exports to China were up by A$1.7 billion (or two per cent) in FY2016, making the market one of the stronger performers amongst Australia’s top 15 export markets.

Exports to the UK did even better, however, soaring by more than 40 per cent – an A$3.5 billion increase (which in turn helped power an A$4.1 billion rise in exports to the EU overall).

Top 15 export markets for goods and services 2015-16, and Change in exports to leading markets in 2015-16

Other top 15 markets that saw healthy growth in export values over FY2016 included the United States (up by almost seven per cent or A$1.4 billion) Vietnam (eight per cent and A$0.4 billion), New Zealand (0.5 per cent and A$4.1 billion) and India (where exports rose by more than two per cent and increased by A$0.3 billion in dollar terms).

The biggest falls in export values were to Japan (down A$8.5 billion, equivalent to an 18 per cent decline), Singapore (down A$2.4 billion or 20 per cent) and Thailand (down A$1.4 billion or 23 per cent). The big falls in exports to Singapore and Thailand contributed to a sharp decline in exports to ASEAN overall, with values down by about four billion dollars (ten per cent).

Australia: Change in exports to top 15 export markets in 2015-16 relative to 2014-15

Digging a bit deeper into the country numbers reveals some interesting stories.

In the case of Australian exports to China, for example, a key theme of the past couple of years has been the sharp decline in the value of iron ore exports and the way this has been increasingly offset by a combination of growing non iron ore goods exports and an increase in exports of services.

Structure and Share of Australian exports to China

Another interesting story is the contrasting fortunes of exports to the UK and to ASEAN. It turns out that there was a common factor at work here: gold. In FY2016, Australian exports of gold to the UK jumped up by about A$3.4 billion (remember, our total exports to the UK were up about A$3.5 billion). This was driven by strong UK demand for gold-backed Exchange Traded Funds (ETFs) in the period leading up to the Brexit referendum[4]. At the same time, the value of Australian gold exports to ASEAN fell by about A$2.6 billion.

Australia: Gold exports to UK and ASEAN, and exports of crude petroleum to ASEN

After gold, the second big contributor to the decline in Australian exports to ASEAN was a drop in the value of exports of crude petroleum, which were down by about a billion dollars, with most of that reflecting a fall in sales to Singapore.

Along with ASEAN, Japan was the other major market to see a sharp decline in export values. Part of the story here was a drop in the value of iron ore exports and a more modest decline in coal exports, but the bigger fall was in exports of confidential items. A look at Japanese import data confirms that this mainly reflects a big decline in the value of Australian LNG sales to Japan. Japan’s imports of LNG declined over FY2016 due to a combination of soft energy demand, low coal prices encouraging substitution, greater consumption of renewable energy and the restart of some nuclear reactors. At the same time, LNG contract prices declined for most of this period, only picking up in June 2016[5].

Australia: Selected exports to Japan, and Japan: LNG imports from Australia

There are also a couple of features worth noting with regard to the continued growth in Australian exports to the United States. First, in terms of the growth picture, the sustained increase in the value of financial, business and information services, which are now worth almost A$4.4 billion dollars, has been a strong contributor, while another good performer has been exports of aircraft and parts, which have grown to be worth more than a billion dollars.

Second, the contribution of beef exports to the United States has been quite volatile in recent years, responding in large parts to fluctuations in US beef production. Exports soared from A$1.4 billion in FY2014 to A$3.2 billion in FY2015 before falling back to A$2.5 billion in FY2016, when US cow beef production increased for the first time in three years. (ABARES forecasts a further fall in exports, of more than 30 per cent, in FY2017).

Australia: Selected exports to the United States

Finally, if we take a step back from looking at developments over the past financial year and instead look at the past decade, it’s clear that from a direction of trade perspective, the big story continues to be the redirection of Australian exports to China. Back in 2005-06, China was the destination for less than 11 per cent of Australian exports by value: by 2015-16 that share had increased by more than 16 percentage points to exceed 27 per cent[6]. Including Hong Kong would push this up still further.

Direct of Australian exports: 2005-06 vs 2015-16

Most other leading markets have seen their export shares squeezed to make space for China over this period, although Malaysia, Vietnam and the UAE are exceptions to this rule, with all three countries accounting for a greater share of exports now than they did back in FY2006.

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[1]  I’ll follow up with a post looking at how the past few months have changed things in the next day or so.
[2]  Down from more than 45 per cent in FY2015.
[3]  This likely reflected demand for gold as a safe haven, with investors nervous about a range of economic and political factors including uncertainty associated with the UK’s Brexit vote and the US election. Gold prices hit a two-year high in the aftermath of the Brexit vote in June 2016.
[4]  See Resources and Energy Quarterly, especially the publication for the September 2016 quarter.
[5]  Again, this draws on the analysis presented in Resources and Energy Quarterly.
[6]  In FY terms, China’s peak share of Australia’s exports of goods and services to date was in 2013-14, when it hit 30 per cent.