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Ins and Outs: Exports Bolster Weakening Economy

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by Liam Harrison
Dec 17 2019

Industry research company IBISWorld anticipates that Australian exports will continue to outperform imports in 2019-20, following current account surpluses in the June and September quarters. These results represent Australia’s first return to a current account surplus since the 1970s. Exports reached $370.0 billion in 2018-19, an increase of 18.4% over the prior year, while imports increased by 1.8%, to $306.7 billion. In 2019-20, IBISWorld anticipates that exports will decline by 4.0%, underperforming imports which are anticipated to grow by 2.9%. Volatility in commodity prices could significantly boost export values, providing support to an economy being weighed down by weak consumer sentiment and sluggish wage growth.

Miners hit the mother lode

Despite detrimental headwinds rising from trade tensions between the United States and China, several mining and energy industries have thrived over the past year. Surging iron ore prices have provided a major boost to the Iron Ore Mining industry, while economic stimulus in China has bolstered demand for Australian commodities.

‘The Brumadinho dam disaster in Brazil in early 2019 took a substantial share of iron ore supply off the global market, creating a gap for Australian producers. This event contributed to remarkable growth in iron ore prices, which has been a huge benefit to Australia. Furthermore, China has been injecting stimulus into its economy through construction projects and other means, which has further supported demand for Australian commodities’ said IBISWorld Senior Industry Analyst, Liam Harrison.

IBISWorld expects iron ore prices to stabilise over the remainder of 2019-20 due to an anticipated slowdown in global economic activity. Local output is also expected to fall slightly compared with the same period over the previous year, resulting in weaker total exports for the 2019-20 financial year.

‘The 2019 calendar year was a great period for Australian miners, but conditions are likely to worsen in 2020,’ said Mr. Harrison.

The Black Coal Mining industry performed strongly in 2018-19, as tighter production regulations in China contributed to greater reliance on Australian exports. However, IBISWorld expects black coal exports to decline in 2019-20, as demand for coal, particularly thermal coal, falls. A shift towards cleaner fossil fuels and renewable energy sources, combined with increasing pressure on larger economies to reduce carbon emissions will likely reduce overall demand for thermal coal.

‘Rising global action on climate change is eroding demand for coal. However, relatively cleaner fuels, such as LNG, are expected to benefit from this trend,’ said Mr Harrison.

IBISWorld estimates that the Liquified Natural Gas Production industry will continue growing in 2019-20, generating revenue of $53 billion, as more production comes online and international demand continues to rise.

Trade war threatens outlook

Australia’s international trade is heavily reliant on growth in China and the United States, and any trade obstacles that hinder their domestic economies are likely to affect Australia’s trade position.

‘Despite the announcement of a Phase One trade deal this week, key points of contention such as intellectual property protections are likely to prevent a complete resolution to the trade war. Consequently, tariffs are anticipated to persist for the foreseeable future’ said Mr Harrison.

The US-China trade war has driven a surge in demand for products that have been tariffed by either country, such as aluminium, and raw materials used to produce aluminium, such as bauxite. Australia is currently exempt from aluminium tariffs, which has benefited the Bauxite MiningAlumina Production, and Aluminium Smelting industries.

‘Australia has benefited from a surge in demand for aluminium products from the US and demand for bauxite from China. However, aluminium prices are anticipated to fall in 2019-20 as global supplies increase, resulting in a net fall in export revenue for Australian producers’ said Mr Harrison.

Agriculture continues to grow

Agriculture and food manufacturing have benefited strongly from a weak Australian dollar over the past five years, which has made Australian food products more competitive in foreign markets.

‘While wheat and other grains have performed well, continued drought conditions on the east coast have reduced water availability for irrigation. This factor has limited the ability of Australian farmers to meet foreign demand,’ said Mr Harrison.

IBISWorld expects drought conditions to continue threatening the Grain Growing industry and its downstream food processing industries, such as the Flour and Grain Milling Product Manufacturing industry. These industries are anticipated to record lower than average exports in 2019-20.

Exports from other food manufacturers, such as the Meat Processing industry, are expected to continue growing in 2019-20.

‘Farmers have continued to reduce herd numbers in response to drought conditions, increasing total supply for meat processors and boosting exports. Overall, meat exports are forecast to reach a historic high of $17.5 billion in 2019-20’ said Mr Harrison.

Demand for motor vehicles falls

While the Motor Vehicle Manufacturing industry’s decline is well known, IBISWorld research has discovered a surprising decline in vehicle imports due to falling demand for new cars. This trend is anticipated to threaten the Motor Vehicle Dealers industry in the upcoming year.

‘Motor vehicle dealers are expected to struggle in 2019-20, as weak consumer sentiment and low wage growth encourage buyers to postpone new car purchases. Motorcycle sales are expected to continue outperforming motor vehicle sales, as they are cheaper to buy and operate,’ said Mr Harrison.

Despite a fall in demand for new vehicles, consumers are expected to demand more electric vehicles in 2019-20, as some consumers grow increasingly concerned with their vehicles’ environmental footprint. Imports for electric and hybrid vehicles exceeded $600 million in 2018-19, and are anticipated to continue climbing as consumers continue to shift towards electric vehicles.

Outlook

IBISWorld anticipates that merchandise trade exports will fall in 2019-20, to $357.4 billion, as commodity prices stabilise over the year. Merchandise imports are anticipated to grow marginally in 2019-20, to $315.6 billion, largely due to a rise in consumption by the public sector. However, the unpredictability of commodity prices could lead to a sudden spike in merchandise exports, resulting in another historic high.

IBISWorld reports used to develop this release:

For more information, to obtain industry reports, or arrange an interview with an analyst, please contact:
Jason Aravanis
Strategic Media Advisor – IBISWorld Pty Ltd
Tel: 03 9906 3647
Email: jason.aravanis@ibisworld.com