Japan Set to Overtake China for Australia’s Biggest Trade Surplus
SYDNEY—When commodity prices were running hot three years ago, Australian companies raced to supply China with raw materials and forged trade links that eclipsed decades-old ties with Japan and South Korea.
Now, plunging commodity prices have changed all that.
Since 2012, Australia’s trade surplus with China has dwarfed its other trading partners. This year, Japan is set to reclaim that title. Extrapolating from trends in the first four months, the government estimates that Australia’s surplus with Japan this year will reach 24.5 billion Australian dollars (US$18.6 billion), compared with a A$19.4 billion surplus with China.
Scroll back only two years, and the China figure was close to A$50 billion—double the number for Japan.
“It’s not that Japan is suddenly important,” said Annette Beacher, head of Asia-Pacific economic research at TD Securities, based in Singapore. “It is just that the supernova of China has been and gone. The recent emphasis on China is clearly warranted, but it’s been at the expense of ever-reliable Japan.”
The improving trade balance with Japan is partly due to dwindling Australian imports of car parts, as the domestic auto industry shuts down. At the same time, the intake of Chinese goods such as electronics, clothes and household goods has been increasing.
However, the main factor influencing the shifting trade balances is iron ore, Australia’s biggest export in dollar terms.
Most of Australia’s exports of the steelmaking ingredient are currently shipped to China, whose economy has been slowing now for some time. A 50% collapse in iron-ore prices over the past year has savaged Australian export earnings, while coal has also experienced massive price falls. China imported 94.4 million tons of coal in 2014, up 7.1% from a year earlier, according to China’s General Administration of Customs.
The decline in commodity prices has reinforced the importance of Australia’s trade ties with Japan, its pre-eminent trading partner for decades before China’s rapid expansion, and raised questions over whether the relationship’s significance is being underestimated.
To be sure, Japan is also a big buyer of Australian commodities, with coal, iron ore and beef currently topping the list. However, Japan imports a broader range of Australian goods than China does. Since the 1980s, Japan has also been a key importer of Australian liquefied natural gas, or LNG—exports of which are expected to increase rapidly as new producers here ramp up output.
Still, it isn’t yet clear whether Japan’s return to the top of the trade-balance charts is a blip or a trend. While the nation’s demand for Australian LNG is expected to rise to 40% of its total intake over the next five years from about a fifth currently, exports to China are also expected to grow substantially—to around 18 billion tons a year by 2020 from 5 billion tons currently.
There is also the chance of iron ore staging a recovery, which could quickly improve the trade balance with China. Many industry analysts, however, believe a prolonged supply glut makes a strong rebound in the price unlikely, just as some expect LNG prices to drop sharply this year and next, in line with the lag effect of a lower oil price.
Any such drop would drive down the value of sales of LNG primarily to Japan, according to Rob Rennie, global head of currency strategy at Westpac Banking Corp. He forecasts that by around the middle of the year, the price of LNG sold to Japan will be half of what it was in mid-2012.
The trade balance isn’t the only measure of the relative importance of Australia’s trade relationships. For instance, China will likely remain Australia’s biggest trading partner this year according to the value of goods exported, which is expected to continue running close to A$80 billion in 2015—twice the value of Australian goods destined for Japan.
How things play out also may be influenced by how quickly recent free-trade deals with both Asian countries are implemented. Australia reached pacts with Japan, China and South Korea, its third-biggest trading partner, in 2014.
Encouraged by the free-trade deal with Tokyo, Marcello Colosimo, chief executive of microbrewer the Australian Brewery, acted late last year to build a beachhead in Japan, linking up with supermarkets there to sell Pilsner and Pale Ale beers.
“Our consumption figures are growing steadily, which is always a good indication,” Mr. Colosimo said. “The FTA is a great win for businesses who wanted to, but weren’t sure how to expand their trade offshore.”
@jhungary @LeveragedBuyout
Japan Set to Overtake China for Australia’s Biggest Trade Surplus - WSJ
SYDNEY—When commodity prices were running hot three years ago, Australian companies raced to supply China with raw materials and forged trade links that eclipsed decades-old ties with Japan and South Korea.
Now, plunging commodity prices have changed all that.
Since 2012, Australia’s trade surplus with China has dwarfed its other trading partners. This year, Japan is set to reclaim that title. Extrapolating from trends in the first four months, the government estimates that Australia’s surplus with Japan this year will reach 24.5 billion Australian dollars (US$18.6 billion), compared with a A$19.4 billion surplus with China.
Scroll back only two years, and the China figure was close to A$50 billion—double the number for Japan.
“It’s not that Japan is suddenly important,” said Annette Beacher, head of Asia-Pacific economic research at TD Securities, based in Singapore. “It is just that the supernova of China has been and gone. The recent emphasis on China is clearly warranted, but it’s been at the expense of ever-reliable Japan.”
The improving trade balance with Japan is partly due to dwindling Australian imports of car parts, as the domestic auto industry shuts down. At the same time, the intake of Chinese goods such as electronics, clothes and household goods has been increasing.
However, the main factor influencing the shifting trade balances is iron ore, Australia’s biggest export in dollar terms.
Most of Australia’s exports of the steelmaking ingredient are currently shipped to China, whose economy has been slowing now for some time. A 50% collapse in iron-ore prices over the past year has savaged Australian export earnings, while coal has also experienced massive price falls. China imported 94.4 million tons of coal in 2014, up 7.1% from a year earlier, according to China’s General Administration of Customs.
The decline in commodity prices has reinforced the importance of Australia’s trade ties with Japan, its pre-eminent trading partner for decades before China’s rapid expansion, and raised questions over whether the relationship’s significance is being underestimated.
To be sure, Japan is also a big buyer of Australian commodities, with coal, iron ore and beef currently topping the list. However, Japan imports a broader range of Australian goods than China does. Since the 1980s, Japan has also been a key importer of Australian liquefied natural gas, or LNG—exports of which are expected to increase rapidly as new producers here ramp up output.
Still, it isn’t yet clear whether Japan’s return to the top of the trade-balance charts is a blip or a trend. While the nation’s demand for Australian LNG is expected to rise to 40% of its total intake over the next five years from about a fifth currently, exports to China are also expected to grow substantially—to around 18 billion tons a year by 2020 from 5 billion tons currently.
There is also the chance of iron ore staging a recovery, which could quickly improve the trade balance with China. Many industry analysts, however, believe a prolonged supply glut makes a strong rebound in the price unlikely, just as some expect LNG prices to drop sharply this year and next, in line with the lag effect of a lower oil price.
Any such drop would drive down the value of sales of LNG primarily to Japan, according to Rob Rennie, global head of currency strategy at Westpac Banking Corp. He forecasts that by around the middle of the year, the price of LNG sold to Japan will be half of what it was in mid-2012.
The trade balance isn’t the only measure of the relative importance of Australia’s trade relationships. For instance, China will likely remain Australia’s biggest trading partner this year according to the value of goods exported, which is expected to continue running close to A$80 billion in 2015—twice the value of Australian goods destined for Japan.
How things play out also may be influenced by how quickly recent free-trade deals with both Asian countries are implemented. Australia reached pacts with Japan, China and South Korea, its third-biggest trading partner, in 2014.
Encouraged by the free-trade deal with Tokyo, Marcello Colosimo, chief executive of microbrewer the Australian Brewery, acted late last year to build a beachhead in Japan, linking up with supermarkets there to sell Pilsner and Pale Ale beers.
“Our consumption figures are growing steadily, which is always a good indication,” Mr. Colosimo said. “The FTA is a great win for businesses who wanted to, but weren’t sure how to expand their trade offshore.”
@jhungary @LeveragedBuyout
Japan Set to Overtake China for Australia’s Biggest Trade Surplus - WSJ
