January’s trade deficit was $1.6 billion, according to the Australian Bureau of Statistics (ABS). That was a 53% increase from December’s deficit. But it was 16% lower than the deficit in December of 2012, according to the ABS. So was it good or bad?
Well, in simple terms, exports were down and imports were up. That’s always a formula for deficits. And frankly, it’s a recurring pattern in Australia. The country has run a trade deficit for thirteen months in a row. But by itself, the deficit doesn’t tell you much about what’s going to happen next. For that, you’d have to look at coal exports.
The quantity of all coal exports was down while the ‘unit value’ was up. This is important because the Reserve Bank of Australia and others have assured us that the rise in export volumes (thanks to the capacity expanding investment boom) will make up for the inevitable and gradual (hopefully) decline in resource prices. But that was not the case in January.
For example, hard coking coal exports, used for steel making, fell $172 million in January, or 13%. Quantities were down 16% while unit values were up 4%. Exports of coking coal to India fell by $140 million, or 39%, with quantities also down 39%. The value of exports to China fell by 30% to $131 million, with quantities down 34% and unit values up by 5%.
Incidentally, the trade deficit data backs up this note we received from a Markets and Money reader earlier this week:
‘Hi PPP guys,
‘I sat next to an open cut coal engineer today. He said coal in Queensland is dead, and the industry is focused on cutting costs and getting positioned for the next run up.
‘Where can the government be getting its info from – the spin factory?
‘Love your work…Mike’
Now, before we pronounce the death of the coal industry, we should point out that the weather in Queensland may have had a fair bit to do with January export volumes. And since the introduction of index-linked iron ore pricing, there’s been a lot more volatility in both iron ore and coal prices. Both the producers and the main consumers have been trying to figure out how to game the system to maximum advantage.
In fact, China’s National Development and Reform Commission (NDRC) – the same NDRC we wrote about in yesterday’s Markets and Money – accused the major iron ore producers of price manipulation yesterday in a note on its website. Hmm. The NDRC has been in the news a lot this week. What could that mean?
The NDRC claims that, ‘The three major miners and some traders have delayed shipments and held back stocks to control supplies in order to send a fake market signal that there was a supply shortage….In this opaque bidding process, the iron ore price is pushed higher.’
It’s a strange world when the leading central planner in a command economy complains about a ‘fake market signal’. What’s really going on here is that the Chinese steel producers are under the pump because of the 83% rise in iron ore prices since September – from $86.70 to $158.90.
Oh how fickle the steel producers are! Do they forget iron ore prices fell by over 40% from April through August of 2012? That happened to precede a giant period of inventory restocking by the steel producer. They filled their boots at lower prices.
We have no particular dog in this fight. Whenever the supply of a commodity is controlled by a small number of producers, the producers are going to have a measure of pricing power. BHP Billiton, Rio Tinto, and Vale control about 80% of the iron ore exported to China. The Chinese like the security of high-quality ore supply. But like any customer, they don’t always like the price.
The only thing at stake here for Australian investors is whether resource stocks, led by the miners, are capable of taking the All Ordinaries higher…or lower. Or, whether the Australian resource sector has temporarily ‘decoupled’ from the stock market. More on what that might mean in plain English. But first, have a look at the chart below.
The black line is the All Ordinaries as of yesterday’s close at 5123. The orange line is the daily price of a pound of copper in the spot market. The red line is the Reuters/Jeffries CRB commodity index, a broad measure of commodity prices. Quite an intriguing picture, isn’t it?
The start date for the chart is the bottom of the market on March 7th, 2009. You can see that up until the middle of November of 2012, all three lines moved in more or less the same pattern. The global money flood reflated stocks and commodities at the same time.
But since November, copper and the CRB have muddled along while the All Ords have taken off. Resources are not driving the market. Instead, more conventional sectors of the market, and stocks with higher yields, are replacing the ‘growth’ stocks of the resource sector. That’s the narrative, at least.
We know what Slipstream Trader Murray Dawes would say about the price action. He’d say it’s a ‘false breakout’ on the All Ords. He’s preparing for a correction by shorting the banks and going long gold stocks. But he’s well aware that the market is capable of staying insane longer than you’re capable of staying sane.
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