australian exports to east asia – lower commodity prices ... · asia changes dietary and leisure...
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Contact Tom Taylor [email protected]
Gerard Burg [email protected]
Phin Ziebell [email protected]
Australian exports to East Asia – lower commodity prices mask improved trade integration by NAB Group Economics 29 April 2016
• NAB surveyed Australian business integration with East Asia in September 2014 and China in December 2015. Recent headline trade data indicate a reversal in the decades-long process of growing integration with our region as exports have declined.
• However, as the series of product line case studies presented here shows, the headline export numbers give an unduly gloomy picture. As the stimulus of record export prices inevitably passed, commodity revenues fell. This masked ongoing progress in lifting commodity export volumes, diversifying the commodity base and lifting earnings in services trade. The fall in the $A (from above US dollar parity) that accompanied falling commodity prices has lifted our competitiveness in manufactures and services, helping support trade volumes.
• Paradoxically, therefore, long term fundamentals for increased integration have improved at the time export earnings have shrunk. The lower $A is boosting market opportunities in key sectors like agribusiness and tourism, already facing favourable prospects as income growth across East Asia changes dietary and leisure patterns. There is still work to be done on removing market access restrictions, despite free trade agreements, improving our efficiency to out-compete low cost rival suppliers and diversifying our product and market export profile in East Asia to limit reliance on a limited range of markets and products.
• The bottom line: Export revenues have been hit by the withdrawal of the sugar hit of the commodity price boom but the deeper process of integration continues.
Links NAB ACRI Australia-China Business Engagement Index
ACRI NAB China-Australia Business Engagement Index
The big picture 4
East Asia buys two-thirds of our exports, with China easily the number one market
5
Export earnings to East Asia have slid across all key markets…
6
…but lower commodity prices mask the increase in export volumes
7
Tough trade environment in East Asia for commodities; this has shifted terms of trade
8
Contents – a road map to East Asian trade integration
Industrial inputs – big price falls erode earnings
9
Industrial activity has slowed across Asia, with falling output in many markets and weaker growth in China
10
Iron ore prices have fallen from 2011 peaks but trade volumes have risen sharply
11
Coal prices have fallen sharply and volumes dipped as China pulled back on imports
12
Lower commodity prices have also hit Australian base metal export values
13 Diversification of the resource export base 14
Australian LNG supply forecast to rapidly increase – with the vast majority contracted to customers in East Asia
15
Lower oil prices have impacted export values recently, but volumes are set to climb, supporting longer term values
16
China now the world’s largest gold market, overtaking India, and Australia’s top export destination
17
China drives world wood demand, lifting Australian exports
18
Construction growth in China has driven growth in mineral sands trade
19
Food and agriculture – bright prospects 20
Rising incomes in East Asia (and accompanying dietary changes) mean bright long term prospects for food exports
21
Beef trade underpinned by rising Asian spending power and dietary trade – although trends are very mixed by country
22
China has become the biggest consumer of sheep meat, however imports have fallen heavily since 2013
23
Surging domestic fluid milk production has seen Chinese imports pull back in recent years…
24
…hitting dairy prices as markets moved into over-supply – though Australia less impacted than New Zealand
25
China’s fruit demand is rising – displacing Japan as the biggest importer in East Asia
26
Wheat markets in Asia impacted by policy – quotas limit trade in the North, growth markets in SE Asia
27
Chinese wheat & corn quotas boost demand for alternatives – growing Australian exports of barley and sorghum
28
Cotton exports to China have crashed as a loss of competitiveness in TCF and farm policy impacts
29
Competition in Asian food markets is tough – Australia a small player in dairy and fruit despite recent growth
30
Contents – a road map to East Asian trade integration (contd)
Services & manufacturing – lower $A brings competitive gains; trade responds
31
Deflating commodity boom has lowered the AUD, boosting competitiveness for services and manufacturing exporters
32
Services exports are dominated by travel, focused on visitors from China
33
Travel is underpinned by tourism and education, with the lower dollar making Australia more attractive to Asia
34
Manufacturing slow to recover volumes – serious erosion in industrial base since 2008 output peak
35
Wine the exception in manufacturing, with exports (particularly to China) continuing to grow
36
The big picture
National Australia Bank – Group Economics | 5
East Asia – easily the biggest market for Australian exports
• One-eighth of everything produced in Australia is sold into East Asia, representing around $210 billion in exports of goods and services in 2014/15 out of $1.6 trillion in GDP.
• East Asia is easily our biggest export market, buying over two-thirds of all goods exported in 2014/15 and 40% of service exports. This dominant export market position has gradually evolved with the rise of China displacing Japan from its previous number one ranking in regional export markets. In 2015, the $80 billion in shipments to China was twice that to Japan.
• China’s rise to predominance initially mirrored the growing preponderance of its heavy industry in global production. This pulled in huge volumes of resource inputs like iron ore, coal and non-ferrous ores and metals – reflected in the rising share of industrial inputs in our export mix to the region. Recently the export mix has begun to diversify as a result of solid growth in services sectors (like education) as well as agribusiness trade.
East Asia buys two-thirds of Australian merchandise exports – China the major player
The shift towards Asia has been a long term trend – reflects shifting balance of global economic power
0
20
40
60
80
100
1948/49 1958/59 1968/69 1978/79 1988/89 1998/99 2008/09
Europe
Asia
Share of Australian goods exports (%)
Sources: RBA, ABS, NAB Economics
United States
Other
0
20
40
60
80
100
2000-01 2002-03 2004-05 2006-07 2008-09 2010-11 2012-13 2014-15
Industrial inputs
Food
Share of Australian exports to Asia (%)
Sources: RBA, ABS, NAB Economics
Gold
Services
Other
China 32%
Japan 16% ASEAN
10%
S Korea 7%
Taiwan 3%
HK 1%
Other 31%
Australian merchandise export markets 2015 % Share
Sources: ABS, NAB Economics
Industrial inputs have dominated trade but diversity now rising in export mix
National Australia Bank – Group Economics | 6
Australian exports hit hard by price slide in East Asian commodity trade
• Australian exports to East Asia have turned down since 2014 as global commodity prices slumped. By late 2015/early 2016 the value of exports was down by around 15% yoy and the loss in goods revenue since April 2014 was equal to around 2½ percentage points of current dollar GDP – a sizeable shock.
• Higher export volumes have offset some of the downturn in commodity prices as increased shipment of resources and services lifted earnings.
• The downturn in exports to East Asia has been broad based with trend declines in shipment values to Japan, China and the emerging market economies of East Asia – a reflection of the tough trading environment facing commodity suppliers to a region experiencing sluggish growth (by its historical standards), little expansion in trade volumes and paying falling prices for the goods it imports.
Export values to East Asia have fallen, other areas holding up better
Lower commodity prices to East Asia slice almost 4 % of Australian $ GDP, higher volumes offset 1.5% of the loss
Export earnings fallen across all major markets as prices have come away from peaks
-40
-20
0
20
40
60
80
-40
-20
0
20
40
60
80
2005 2007 2009 2011 2013 2015 2005 2007 2009 2011 2013 2015
Change in exports (% yoy)
Sources: ABS, NAB Economics
% ppts growth
East Asia
Total exports
Other markets
East Asia
Total exports
Other markets
0
20
40
60
80
100
2005 2007 2009 2011 2013 2015
Australian exports ($ billion, 12mma)
Sources: ABS, NAB Economics
Emerging Asia
Japan
China
-4
-2
0
2
4
6
8% of GDP
Sources: ABS, NAB Economics
Mar-10 to Apr-14 Apr-14 to Feb-16
National Australia Bank – Group Economics | 7
Upside - Lower prices mask strong commodity export volumes
• The downturn in export earnings masks the extent to which Australia is still integrating into the East Asian region. Lower commodity prices have certainly dragged down the value of exports but the volume of exports into the region has kept climbing and that shows every likelihood of continuing as the surge in LNG exports comes on through the next few years.
• These solid export volumes give a truer picture of the underlying trend of our integration into the region - and it is still making progress.
• Although the export product mix to key Asian markets varies, commodities are generally the dominant component. This is particularly the case with Japan – where hopes that the export base might become more diversified to include a greater share of manufactures and services have been disappointed. Exports to the other big resource-intensive markets of China, South Korea and Taiwan are also mainly made up of commodities with Hong Kong and Singapore showing a more diverse export mix.
0 20 40 60 80 100
JapanChina
S KoreaTaiwan
ThailandIndonesiaMalaysiaVietnam
SingaporePhilippines
HK
Composition of Australian exports 2014/15 (%)
Sources: ABS, NAB Economics
Services
Commodities
Manufactures
50
75
100
125
150
175
200
225
250
275
0
2
4
6
8
10
12
14
16
18
2005 2007 2009 2011 2013 2015 2006 2008 2010 2012 2014
Monthly exports to East Asia ($ billion)
Sources: ABS, RBA, NAB Economics
RBA Commodity Prices
Index (Jan-05 = 100)
Export volumes
0
50
100
150
200
250
300
350
400
0
5
10
15
20
25
30
35
40
45
50
2000 2006 2012 2002 2008 2014
Australian resource exports ($ billion, volumes)
Sources: ABS, RBA, NAB Economics
Export values
Price index (Q1 2005 = 100)
Other producers
A$ export prices
US$ export prices
Other fuel volumes
Metal ores volumes
Coal volumes
Decline in commodities exports is price driven, with volumes generally trending higher
Commodity volumes to East Asia have continued to increase, lower prices drag down export revenues
Australian export mix to Asia differs considerably between countries
National Australia Bank – Group Economics | 8
Australian commodity exporters face a tough environment in East Asia
• East Asia – normally one of the powerhouses of globalisation – is experiencing a downturn in trade. While the decline in regional import values is not as severe as during the global financial crisis, it has been prolonged, serious and unusual for a period when the global economy is slowly growing and not in outright recession.
• Subdued growth in trade volumes explains some of these poor trade outcomes in a historically fast growing and open trading region. Sharply falling import prices for the goods imported into East Asia also account for the decline in the region’s purchases and many of these imports are commodities. Falling import prices in East Asia have delivered sizeable gains in the terms of trade to the region’s economies, boosting their national income. This represents the other side of the coin of the falling export prices and terms of trade experienced by big commodity suppliers into the region like Australia and New Zealand.
Sharp pull back in trade flows mostly driven by prices, with volumes falling less significantly
-40
-20
0
20
40
60
80
100
-40
-20
0
20
40
60
80
100
2005 2007 2009 2011 2013 2015 2005 2007 2009 2011 2013 2015
Other East Asia
China
% yoy
Sources: CEIC, NAB Economics
China
Japan
Japan
% yoy
Import values US$ Import volumes from all countries
Other East Asia
70
80
90
100
110
120
130
140
150
160
70
80
90
100
110
120
130
140
150
160
2005 2007 2009 2011 2013 2015 2005 2007 2009 2011 2013 2015
South Korea
China
Taiwan
Index (Jan-10 = 100)
Sources: Datastream, NAB Economics
Australia
New Zealand
South Africa
Japan
Index (Jan-10 = 100)
Commodity importers - import prices
Commodity exporters - export prices
75
100
125
150
75
100
125
150
2005 2007 2009 2011 2013 2015 2005 2007 2009 2011 2013 2015
South Korea China
Taiwan
Terms of trade index (Jan-10 = 100)
Sources: Datastream, NAB Economics
Australia New Zealand
South Africa Japan
Index (Jan-10 = 100)
Commodity importers Commodity exporters
Falling commodity prices drive big shifts in the terms of trade – affects national incomes
Sliding commodity prices bring winners and losers – importing economies gain, exporters lose revenue
Industrial inputs – big price falls erode earnings
National Australia Bank – Group Economics | 10
Industrial activity has slowed across Asia – led by China’s weaker growth
• The downturn in Australian resource export values reflects the onset of tougher times in East Asian heavy industry. Chinese industrial growth is on a declining trend and industrial output across Japan and the rest of the region is running below year earlier levels. The weakness is broad-based with a run of weak output results for all the key economies starting in early 2015 and the onset of falling producer output prices as over-capacity in key heavy industries has led to fierce competition.
• Steel industry inputs are the biggest item in resource exports to East Asia – worth $65 billion in 2015, down from almost $90 billion in 2013. As China accounted for $43 billion of these exports in 2015, trading conditions in the Chinese steel industry have become the most important single driver of Australian exports. Chinese steel has had a difficult period with revenue dropping below year earlier levels as overcapacity drives steel output prices down.
-75
-50
-25
0
25
50
75
100
-30
-20
-10
0
10
20
30
40
2006 2008 2010 2012 2014 2016 2007 2009 2011 2013 2015
Change in mill output (Mt)
Sources: CEIC, Datastream, NAB Economics
World
Chinese steel industry indicators (% yoy)
Other producers Steel prices
Output volume
China
Revenue
Conditions in China’s steel industry have deteriorated in recent years on weaker construction demand
-30
-20
-10
0
10
20
-30
-20
-10
0
10
20
2006 2008 2010 2012 2014 2016 2007 2009 2011 2013 2015
Output volume (% yoy)
Sources: CEIC, NAB Economics
Other emerging
Output prices (% yoy)
Japan
Japan
South Korea China
China
Industrial activity has softened across Asia – with falling output in many markets plus weaker growth in China
National Australia Bank – Group Economics | 11
Iron ore trade hit by lower prices but volumes hold up
0
200
400
600
800
1000
0
20
40
60
80
100
2008 2010 2012 2014 2009 2011 2013 2015
Australia
Chinese iron ore imports (US$ billion)
Sources: CEIC, NAB Economics
Brazil
Chinese iron ore imports (Mt))
South Africa
India
Australia
Brazil
India
South Africa
0
10
20
30
40
50
60
70
80
0
100
200
300
400
500
600
700
800
2005 2007 2009 2011 2013 2015 2005 2007 2009 2011 2013 2015
China
Australian iron ore exports (Mt)
Sources: ABS, NAB Economics
Japan
Export values ($ billion)
Korea & Taiwan
Other
China
Japan Korea & Taiwan
Other
0
25
50
75
100
125
150
175
200
2011 2012 2013 2014 2015 2016Sources: ABS, CEIC, NAB Economics
Chinese import prices
Australian export prices
Iron ore prices (US$/t)
Steel sector downturn drags down global iron ore prices China’s iron ore imports have continued to increase in volume terms – with Australia gaining market share
Australian iron ore exports have continued to climb, with producers favouring volume over profit
• East Asia accounts for the decline in Australian export earnings. Australian iron ore exports have fallen from almost $70 billion in 2013 to just under $50 billion in 2015. This $20 billion fall in earnings exceeded the $12 billion decline in Australian total goods exports over the same period. Iron ore exports to the 4 big East Asian steel producers fell from $69 billion to $48 billion between 2013 and 2014 while shipments of coking coal declined from $19 billion to $17 billion.
• Iron ore is the best example where falling export values suggest lower integration with East Asia but the volume of shipments is actually increasing. The steep fall in global iron ore prices from their 2011/12 peak has eroded both total Chinese iron ore import values and Australian exports.
• Masked by these lower prices is a still rising trend in the volumes of both Chinese iron ore imports and Australian exports, despite the downturn in Chinese steel production. Australia is easily the biggest foreign iron ore supplier to China, with its biggest producing firms ramping up output, despite the tougher market conditions.
National Australia Bank – Group Economics | 12
Price slide hits coal exports and volumes dip slightly
0
50
100
150
200
250
300
0
50
100
150
200
250
300
2003 2006 2009 2012 2015 2004 2007 2010 2013
China - thermal
Coal imports (Mt 12mma)
Sources: CEIC, ABS, NAB Economics
Japan - total
Thermal coal
Coking coal
China - coking
Coal prices (US$/t)
South Korea - total
0
5
10
15
20
25
30
35
0
25
50
75
100
125
150
175
2005 2007 2009 2011 2013 2015 2005 2007 2009 2011 2013 2015
India
AU coking coal exports to Asian markets (Mt)
Sources: ABS, NAB Economics
China
Export values ($ billion)
Japan
Korea & Taiwan
India
China
Japan
Korea & Taiwan
0.0
2.5
5.0
7.5
10.0
12.5
15.0
17.5
20.0
0
25
50
75
100
125
150
175
200
2005 2007 2009 2011 2013 2015 2005 2007 2009 2011 2013 2015
India
AU thermal coal exports to Asian markets (Mt)
Sources: ABS, NAB Economics
China
Export values ($ billion)
Japan
Korea & Taiwan
India
China
Japan
Korea & Taiwan
Weakness in coal markets driven by falling Chinese imports – as electricity and steel demand soften – prices fall heavily
Australian coking coal exports dip in line with fall in Chinese coal imports as steel mills opt for local coal
Falling Chinese electricity consumption in 2015 limited thermal coal demand and Australian volumes
• The downturn in Chinese steel output has squeezed demand for imported coking coal and that has been reflected in both much lower coal prices and a modest downturn in Australian export volumes to that market. As China accounts for a 20% of Australian coking coal exports as opposed to 80% for iron ore, the downturn in Chinese steel has had less direct impact on Australia’s coal trade. However, although centred on the half of world steel output located in China, the steel downturn has become global with falling output through late 2015 and early 2016 in most key producers – including the key export markets of Japan, India, Taiwan and – until recently – South Korea.
• As Japan still buys almost half of Australian thermal coal exports, well ahead of China’s 17%, electricity demand in Japan is the key driver of overseas demand and the generation of thermal power has been falling in Japan since 2014 – cutting the need for coal. Falling power demand in Chinese heavy industry through late 2015 also saw big declines in both Chinese imports and Australian exports of thermal coal.
National Australia Bank – Group Economics | 13
Metals – Australian export values hit by the commodity price downturn
• Total non ferrous metal exports peaked at around $14 billion in the latter half of 2007 before the global financial crisis cut them sharply and they have since averaged around $10 billion annually.
• East Asia accounts for around half of global non-ferrous metals output and even that is not enough to supply its massive demand for these products. Consequently, Australia is also a major supplier of non ferrous metals to the region with shipments peaking at annual rate of $11 billion in early 2007 and still running at $8 billion in the 12 months ended in early February 2016.
• These fluctuations in metal exports reflect the big swings in the prices of key metals, which have been caught up in the general downturn in global commodity markets seen in the last few years. Underlying export volumes to the region remain strong.
Asia – led by China – has come to dominate global non-ferrous metal consumption
0
50
100
150
200
250
300
0
2
4
6
8
10
12
2000 2003 2006 2009 2012 2015 2001 2004 2007 2010 2013
Japan
Export values (A$ billion)
Sources: ABS, Datastream, NAB Economics
China
US$ price index (Jan-05 = 100)
Non-ferrous aggregate
S Korea, Taiwan, HK
ASEAN Aluminium
Copper
Falling metals prices have hit the value of Australian metal exports in recent years
0 20 40 60 80 100
Aluminium
Copper
Lead
Nickel
Zinc
Share of global non-ferrous metals consumption (%)
Sources: BREE, NAB Economics
S Korea
China
Japan
Taiwan
ASEAN
Other
Diversification of the resource export base
National Australia Bank – Group Economics | 15
Australian LNG supply forecast to rapidly increase
• Australia is significantly ramping up LNG production capacity, with new terminals in Western Australia, Queensland and the Northern Territory opening over the coming two years. This will give Australia the world’s largest LNG production capacity – around 85 million tonnes per annum (mtpa) by 2017, around one-fifth of global capacity.
• Australia exported 27.6 million tonnes of LNG in 2015. NAB forecasts that exports will total 52.7 million tonnes in 2016 and 69.0 million tonnes in 2017.
• The vast majority of Australian LNG is contracted to customers in
East Asia. Japan will take almost half of contracted LNG, China around a quarter and South Korea around 10-15% (depending on year).
Australian LNG exports are expected to more than triple by 2018 (compared to 2014)
The vast majority of contracted LNG exports are destined for Asia
Projects in Western Australia and Queensland dominate LNG exports
0
5
10
15
20
1995 2000 2005 2010 2015 2020
Australian LNG exports (Mt a quarter)
Sources: Bloomberg, Poten & Partners, NAB Economics
0
10
20
30
40
50
60
70
80
90
1990 2000 2010 2020 2030 2040
China
Japan
Sources: Bloomberg, Poten & Partners, NAB Economics
South Korea
Taiwan Flexible/unspecified/
other
Australian LNG exports (Mtpa, unadjusted contracted supply)
0
5
10
15
20
2015 2020
Wheatstone
Shell Portfolio
Prelude Floating
Pluto
Ichthys
Gorgon
GLNG
Darwin
QCLNG
Browse
BG Portfolio
North West Shelf
APLNG
Australian LNG exports (Mt a quarter)
Sources: Bloomberg, Poten & Partners, APPEA, Oxford, NAB Economics
National Australia Bank – Group Economics | 16
LNG prices likely to remain muted but volume will support growth
• We have developed an Australian LNG export price indicator based on ABS international trade data and LNG cargoes reported by Poten & Partners. A history of this series from 2000 is shown to the left.
• East Asian LNG prices have fallen significantly since mid-2014 on the back of lower oil prices, to which many LNG contracts are tied. For example, most Japanese LNG contracts are based on the Japan Crude Cocktail (JCC) – the import price of crude oil into Japan.
• While we expect crude oil prices to remain low in USD terms for at least the next two years, a lower AUD will provide some support to local prices.
• In export value terms, the price collapse will offset of the increased supply this year but we forecast values to grow from 2017. We see the value of Australian LNG exports at just under $17 billion in 2016, a slight increase on 2015.However, the value of exports should begin to climb again by early 2017, reaching $25.7billion in 2017.
Most East Asian LNG contracts are tied to oil prices, which have fallen substantially since new Australian projects were approved
The value of exports will grow strongly, despite lower forecast prices (quarterly data shown)
0
4
8
12
16
20
0
2
4
6
8
10
2000 2005 2010 2015
Australian export values ($b) Export volumes (Mt)
Export values (LHS)
Export volumes (RHS)
0
2
4
6
8
10
12
14
0
20
40
60
80
100
120
140
2000 2005 2010 2015
Oil price (US$/bbl) LNG price (US$/GJ)
NAB forecasts
Tapis crude (LHS)
LNG export price (RHS)
Source: Bloomberg, Poten & Partners, APPEA, Department of Industry, ABS, NAB Economics Photo: Ken Hodge
National Australia Bank – Group Economics | 17
Gold – China becomes world’s biggest gold market, boosting our exports
• China has displaced India as the world’s biggest gold market. Chinese jewellery buyers consumed 783 tonnes of a 2015 world total of 2400 tonnes, well ahead of India’s 654 tonnes. Chinese investment demand for gold bar and coins was 201 tonnes in 2015, ahead of India’s 195 tonnes and China was around 20% of the global gold investment market.
• Falling interest rates on financial assets helped drive Chinese gold investment demand and rising wealth has seen gold take its place as a liquid asset in investor portfolios. Increased household incomes have supported jewellery demand with increased numbers of retail outlets and need for stocks.
• Rising Chinese gold demand has been reflected in trade flows with a ramping up in Australian gold exports as well as flows via Hong Kong. This represents a diversification in our export base to China and widens the range of influences driving our export trade to include Chinese jewellery purchases and investor decisions on the portfolio allocation – previously not important trade factors.
0
100
200
300
400
500
0
200
400
600
800
1000
2008 2010 2012 2014 2009 2011 2013 2015
Tonnes
Sources: World Gold Council, NAB Economics
China
Tonnes
India
China
India
Jewellery Bar and coin
0
250
500
750
1000
1250
1500
1750
2000
0
1
2
3
4
5
6
7
8
2000 2003 2006 2009 2012 2015 2001 2004 2007 2010 2013
3 year corporate
%
Sources: CEIC, Datastream, NAB Economics
Household 3 year savings
Gold price
China 10 RMB/tr oz Shanghai
exchange
Online money market funds
US$/oz
Corporate 1 year savings
Chinese returns for savers Gold prices
Low returns for savers help drive gold investment demand as a liquid store of wealth in China plus jewellery market
0
200
400
600
800
1000
1200
1400
1600
0
2
4
6
8
10
12
14
16
2000 2004 2008 2012 2003 2007 2011 2015
India
China
Australian gold exports ($ billion)
ASEAN
Other
Hong Kong exports to China
Sources: ABS, Hong Kong Customs, NAB Economics
Tonnes
China has become the key market for Australian gold exports
China joins India as global scale gold market
National Australia Bank – Group Economics | 18
Wood – China driving world demand, lifts Australian exports
• East Asia has been by far the biggest market for Australian forest products with the woodchip trade to Japan accounting for most of the export trade.
• The surge in Chinese construction has underpinned a rise in wood export trade to East Asia well as a broadening out in the product mix. China has joined Japan as a key market for woodchips and its building boom has seen China emerge as a huge market for other products from suppliers like Australia and New Zealand.
• China tends to import less highly processed wood products like roundwood and pulp. Although its massive construction industry consumes very high shares of global demand for plywood, fibreboard and panels, the value adding is usually done within China.
Construction boom makes China major global wood market
Woodchips and logs to China become big Australian trades China displaces Japan as key market for raw wood products
0
20
40
60
80
100
0
20
40
60
80
100
Annual wood consumption (% share)
Sources: FAO, NAB Economics
Annual wood imports (% share)
America America
China
China Other Asia
Other Asia Europe
Europe
Other Other
0
100
200
300
400
500
600
0
250
500
750
1000
1250
1500
2005 2007 2009 2011 2013 2015 2005 2007 2009 2011 2013 2015
Australian woodchip exports ($m)
Sources: ABS, NAB Economics
Other wood exports ($m)
China & HK
Japan
Korea, Taiwan
Other Other
China & HK
Korea, Taiwan
Japan
ASEAN
0
100
200
300
400
500
600
700
800
0
200
400
600
800
1000
1200
1400
1600
1990 1996 2002 2008 2014 1995 2001 2007 2013
Australian woodchip exports (kt)
Sources: ABARES, NAB Economics
Roundwood (th sq m)
China & HK
Japan
Korea, Taiwan
Other Other
China & HK
Korea, Taiwan
Japan Other
Other/ not stated
Note: Data impacted by confidentiality in 2013
19
Mineral sands – growth in China’s construction demand
0
200
400
600
800
1000
1200
0
500
1000
1500
2000
2500
3000
2008 2010 2012 2014 2008 2010 2012 2014
China titanium dioxide ore imports (kt)
Sources: UN Comtrade, NAB Economics
Australia
Mozambique
Vietnam
India Other Other
Australia
India
Vietnam
Mozambique
Other
China imports (US$m)
0
200
400
600
800
1000
1200
1400
0
200
400
600
800
1000
1200
1400
2008 2010 2012 2014 2008 2010 2012 2014
China zirconium ore imports (kt)
Sources: UN Comtrade, NAB Economics
Australia
Other
South Africa
Indonesia
Other
Australia
China imports (US$m)
Other
South Africa
Indonesia
• Demand for mineral sands products – titanium dioxide and zircon – typically grow in line with GDP trends – reflecting their use in paint and ceramic products respectively used in construction.
• Titanium dioxide is a white pigment used in paint, plastics and paper, while zircon is consumed in ceramics and glass. Overall consumption of these products is therefore closely linked to construction activity and China’s construction boom has seen it account for a very high share of global demand for all materials involved in building (raw timber, cement, mineral sands)
• China is the world’s largest consumer of both minerals – at over 40% of the global total in 2013. Australia is one of the world’s biggest exporters of mineral sands, much of it goes to China and Chinese firms are heavily involved in planned mining projects in Australia.
• China’s titanium ore import volumes have fallen from 2012 peaks as domestic production has expanded. According to Iluka, Chinese ores are typically lower grade than internationally traded ores.
China 46%
Other Asia Pacific
17%
Europe 20%
North America 9%
Other 8%
World zircon consumption 2013 % Share
Sources: Iluka, NAB Economics
China's share of global titanium dioxide consumption: 44% (2013)
China’s construction growth lifts paint demand
Construction boom lifts demand for ceramics – such as tiles – but market cycle still influences demand
China has grown to be the leading consumer of both titanium dioxide and zircon
Food and agriculture – bright prospects
National Australia Bank – Group Economics | 21
Rising incomes mean bright long term prospects for food exports
0
500
1000
1500
2000
2500
3000
3500
4000Cereals Sugar Fruit/veg Oils/fats Meat Milk Other
Structure of diet (2014 kcal per capita a day)
Sources: FAO, NAB Economics
Australia
Japan
South Korea
New Zealand
Malaysia
Thailand
China
Indonesia
Philippines
Laos Myanmar
Cambodia
0
100
200
300
400
500
600
0 10000 20000 30000 40000 50000
Average supply of animal protein (daily grams per capita)
Sources: FAO, NAB Economics Annual income per capita (PPP$)
40
60
80
100
120
140
160
Poorest10%
11 to 20% 21 to 40% 41 to 60% 61 to 80% 81 to 90% Richest10%
China per capita food consumption 2014 (median income level = 100)
Sources: NBS, NAB Economics
Fruit
Mutton Beef
Milk powder
Milk
• With increases in income generally leading to shifts in diet, the rise in East Asian spending power – with its influences like the growing number of middle class people who have travelled internationally - is producing new opportunities for food exports.
• The scale of opportunities opening up in China stands out in the region, reflecting the sheer size of its economy (four times the size of Japan) and the rapid pace of household income growth.
• China is experiencing the classic shifts in diet seen as household’s get richer – reduced dependence on staple grains, increased consumption of animal protein (meat, dairy) and rising consumption of fruit. Comparisons of food consumption spending patterns across income groups in China show how the demand for meat, dairy and fruit rises alongside household income, highlighting the huge scale of market potential.
Diet changes as income rises – increased animal protein and reduced role of basic grains
Scope for substantial increases in animal protein consumption across East Asia as income rises
Chinese household income growth lifts demand for meat, dairy and fruit – process set to continue
National Australia Bank – Group Economics | 22
Rising Asian spending power and dietary change underpin beef trade
• Beef demand trends in the biggest economies of East Asia show a very mixed picture. Chinese consumption and per capital demand have been trending up while Japan has gone the other way. There is ample scope for more growth in the Chinese beef market as incomes there rise and the market dominance of pork and poultry gets eroded.
• Shifts in demand have flowed into trade with Chinese beef imports rising from under 10kts in 2008 to over 650 kts in 2015 while 2015 Japanese beef imports of 700 kts are around one-third lower than they were in 2000.
• South Korea and Taiwan are also major beef importers with imports of around 550 kts in 2015 and rising per capita consumption in South Korea.
• East Asia is one of the key markets for the Australian beef industry, accounting for around $5 billion out of $9.3 billion in total 2015 exports. Exports to China have risen to around $1 billion but Japan is still the biggest outlet at $1.9 billion.
0
10
20
30
40
50
60
70
80
0
2
4
6
8
10
12
14
1984 1990 1996 2002 2008 2014 1986 1992 1998 2004 2010
South Korea
China
Annual per capita beef consumption (kg)
Sources: International Meat Secretariat, CEIC, NAB Economics
Japan
Chinese annual meat output (Mt)
Pork
Beef
Mutton
Indonesia 0
1000
2000
3000
4000
5000
6000
0
150
300
450
600
750
900
2005 2007 2009 2011 2013 2015 2005 2007 2009 2011 2013 2015
ASEAN
China
Export volumes (kt)
Sources: ABS, MLA, NAB Economics
Japan
Export values (A$ million)
Korea & Taiwan
ASEAN
China
Japan
Korea & Taiwan
0
200
400
600
800
1000
1200
1400
1600
0
1000
2000
3000
4000
5000
6000
7000
8000
2000 2004 2008 2012 2016 2002 2006 2010 2014
South Korea & Taiwan
China
SE Asia
Beef consumption (kt)
Sources: USDA, NAB Economics
Japan
Beef imports (kt)
Consumption Imports
South Korea & Taiwan
China
SE Asia
Japan
Beef consumption increases with wealth – China’s per capita consumption still modest compared with neighbours
China has been the key contributor to recent export volume growth – though volumes to Asia have stagnated recently
China’s beef imports have risen rapidly in recent years, but still a modest share of consumption
National Australia Bank – Group Economics | 23
Sheepmeat – market cycles still exist even though demand is rising
• China is easily the biggest producer and consumer of sheep meat in the world, with domestic output 3 times larger than Australian production from a flock this is more than twice as big. Other important markets include South Korea, Japan and Indonesia. China accounts for a quarter of world sheep meat imports
• Chinese per capita mutton consumption tends to rise as household income increases but per capita demand remains well below that seen in South Korea or Indonesia. Pork and poultry dominate Chinese meat consumption and there is ample scope for sheep meat consumption to expand as diets change.
• Despite this favourable structural backdrop to demand, last year showed that it is still necessary to track the domestic supply-demand balance. Mutton exports to China halved between 2013 and 2015 and lamb shipments fell heavily as well. This reflected a build up in sheep meat held in store as local supply was strong.
0
5
10
15
20
25
30
35
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
1983 1988 1993 1998 2003 2008 2013 1983 1988 1993 1998 2003 2008 2013
South Korea
China
Annual per capita mutton consumption (kg)
Sources: International Meat Secretariat, CEIC, NAB Economics
Japan
Chinese rural per capita demand (kg)
Pork
Beef
Mutton
Indonesia
Poultry
0
100
200
300
400
500
600
700
800
0
20
40
60
80
100
120
140
160
2005 2007 2009 2011 2013 2015 2005 2007 2009 2011 2013 2015
ASEAN China
Export volumes (kt)
Sources: ABS, MLA, NAB Economics
Japan
Export values (A$ million)
Taiwan
ASEAN China
Japan
Taiwan
EU 34%
China 25%
Middle East 17%
US 6%
Other 18%
World sheep meat imports 2013 % Share
Sources: International Meat Secretariat, NAB Economics
Demand trends for sheep meat differ considerably between key markets
Australia’s sheep meat exports have increasingly headed to China, though the pull back since 2013 has hit values
China was a major import market in 2013, but imports have fallen heavily since
National Australia Bank – Group Economics | 24
Dairy – Chinese demand for milk powder now a key global market driver
0
200
400
600
800
1000
0
400
800
1200
1600
2000
2000 2003 2006 2009 2012 2015 2000 2003 2006 2009 2012 2015
Taiwan
Domestic consumption (kt)
Sources: USDA, NAB Economics
China
Import volumes (kt)
SE Asia
China
SE Asia
Taiwan
0
50
100
150
200
250
300
0
50
100
150
200
250
300
350
2000 2003 2006 2009 2012 2015 2000 2003 2006 2009 2012 2015
Taiwan and South Korea
Domestic consumption (kt)
Sources: USDA, NAB Economics
Japan
Import volumes (kt)
SE Asia
Japan
SE Asia
Taiwan and South Korea
China now having a major impact on whole milk powder markets, with consumption rising, but imports falling
Demand for cheddar cheese more evident in the more mature economies of the region
China’s fluid milk production has surged – with output exceeding Australia and New Zealand combined
• East Asia is a major global dairy producer, particularly China whose fluid milk output exceeds that of Australia and New Zealand combined. While China has become a major market for dairy exporting nations, rising domestic output has accounted for the bulk of the 30 million tonne lift in milk consumption between 2000 and 2015.
• Despite a four-fold increase in local milk output since 2000, China has still become the world’s biggest import destination for milk powder and third biggest for non-fat dry milk. Nowhere else in East Asia has seen a growth in dairy trade opportunities of comparable scale. The Japanese milk market was not much smaller than China’s in 2000 but demand has actually fallen since then and by 2015 it was around one-sixth of that in China.
• Japan is however one of the world’s biggest markets for cheese and dietary change (pizzas etc) have ensured that product’s growth and similar trends are evident in other East Asian economies. Cheese exports to Japan are still Australia’s biggest dairy trade item.
0
250
500
750
1000
1250
1500
1750
2000
0
5
10
15
20
25
30
35
40
2000 2004 2008 2012 2016 2002 2006 2010 2014
China fluid milk (Mt)
Sources: USDA, CEIC, NAB Economics
China whole milk powder (kt)
Imports
Factory milk consumption
Fluid milk consumption
Production Consumption
Production
0
1000
2000
3000
4000
5000
6000
0
400
800
1200
1600
2000
2005 2007 2009 2011 2013 2015 2006 2008 2010 2012 2014
Japan
Annual exports (A$ million)
Sources: ABS, AHDB, NAB Economics
China
Oceania dairy prices (US$/tonne)
Butter
S Korea, Taiwan, HK
ASEAN
Cheese
Skim milk powder
National Australia Bank – Group Economics | 25
Dairy – Structural demand lift does not mean end of weak market phases
Chinese milk prices and imports show signs of market stress Australian dairy exports to East Asia
Australian dairy exports and world prices
0
25
50
75
100
125
0
100
200
300
400
500 Skim milk powder
Export values ($A million)
Cheese
Export volumes (kt) Whole milk
powder
Butter
Skim milk powder
Cheese
Whole milk powder
Butter
Sources: ABS, NAB Economics
• While China’s dairy consumption is increasing and the lift in milk demand as income rises bodes well for the future, that does not mean that everything is plain sailing.
• Global dairy export prices have fallen heavily since 2014 and part of the reason is over-supply into the Chinese market plus a softening in the pace of Chinese dairy demand growth. The ramping up of milk-powder stocks and the drop in Chinese milk prices testify to a market experiencing problems and these were duly reflected in a halving in the volume of Chinese imports of whole milk powder last year as well as a fall in import volumes of non-fat dry milk.
• The New Zealand dairy industry has been hit hard by the onset of tougher times in the Chinese dairy market as it accounts for 90% of the whole milk powder trade and over half of Chinese non-fat dry milk imports. Australia’s industry was less exposed as China is less prominent in its dairy market mix and its product mix is more diverse with less reliance on milk powder.
1.5
2
2.5
3
3.5
4
4.5
5
0
50
100
150
200
250
300
350
2009 2011 2013 2015 2010 2012 2014
Milk powder stocks (kt)
Sources: CEIC, USDA, NAB Economics
Fresh milk (RMB/kg)
National Australia Bank – Group Economics | 26
Fruit – China leads the way in demand and trade
• China has displaced Japan as the biggest fruit importer in East Asia. As Chinese fruit consumption rises alongside income and household incomes are steeply rising, the Chinese market looks likely to become increasingly dominant in the region.
• China is also a massive fruit producer so foreign suppliers gain market niches by trading on their quality and counter-seasonal supply availability – both of which help Australian growers in important markets like citrus and grapes.
• Australian fruit exports to the region have been growing rapidly, rising from around $300 million in 2010 to around $800 million in 2015. Hong Kong has long been a crucial intermediary stage market for Asian fruit trade but the value of shipments going directly to China is now growing rapidly as well.
• Free trade agreements will help improve market access for Australian fruit but it is also crucial that quarantine agreements are made and standards maintained.
0
1
2
3
4
5
6
7
0
1
2
3
4
5
6
7
2005 2007 2009 2011 2013 2015 2005 2007 2009 2011 2013 2015
South Korea
China
Total import volumes (Mt)
Sources: CEIC, NAB Economics
Japan
Total import values (US$ billion)
China
Japan
South Korea
0
50
100
150
200
250
0
200
400
600
800
1000
2005 2007 2009 2011 2013 2015 2005 2007 2009 2011 2013 2015
HK, Taiwan, South Korea
China
Exports from Australia (A$ million)
Sources: ABS, NAB Economics
Japan
Exports from Australia (A$ million)
China
Hong Kong
Singapore
ASEAN
Vietnam
China’s rising consumption has driven the increase in Asian fruit demand and trade
Australia’s share of China’s market still small, despite recent growth
0
50
100
150
200
250
300
0
50
100
150
200
250
300
1990 1994 1998 2002 2006 2010 2014 1991 1995 1999 2003 2007 2011 2015
South Korea
Orange import volumes (kt)
Sources: USDA. NAB Economics
China
Fresh grape import volumes (kt)
Japan
SE Asia
Hong Kong
Japan
South Korea
China
Hong Kong
SE Asia
Chinese fruit imports surge, now the dominant regional market
National Australia Bank – Group Economics | 27
Role of policy – North Asian quotas limit trade, growth markets in SE Asia
• China ranks number 2 in global wheat consumption but imports only supply 3 million of the 112 million tonnes consumed. This low share reflects Chinese farm policy with a 1% tariff rate on wheat brought in under the 9.6 million tonne quota but 65% tariffs paid above that and 90% of the trade in the hands of state trading enterprises. This restrictive trade policy helps hold Chinese domestic wheat prices well above global levels, helping local farm incomes but penalising Chinese consumers and industry.
• Japan imports around 5¾ million tonnes of the 6½ million tonnes it consumes but again there is a quota of 5.74 million tonnes limiting imports. Australia supplies the special wheats used for noodles to both Japan and S Korea, that product differentiation providing a greater degree of market security but securing the required quality and getting a premium price in the Japanese import system raises issues for growers in this trade and could limit supply.
• Quotas in China and Japan help ensure that SE Asia is the biggest market for Australian wheat, Indonesia has long been a top ranking market and Vietnam trade has been growing rapidly.
Massive Chinese market largely closed, SE Asia the key importer
East Asia our biggest wheat market but policy constrains trade
0
4000
8000
12000
16000
20000
0
1000
2000
3000
4000
5000
2005 2007 2009 2011 2013 2015 2005 2007 2009 2011 2013 2015
Australian wheat exports ($m)
Sources: ABS, NAB Economics
Australian wheat exports (kt)
China Japan
Korea, Taiwan
China
Korea, Taiwan
Japan
Other ASEAN
Indonesia
Other ASEAN
Indonesia
0
5
10
15
20
25
0
50
100
150
200
250
2000 2004 2008 2012 2003 2007 2011 2015
South Korea
Wheat consumption (Index 2000=100)
Sources: USDA, NAB Economics
China
Wheat imports (Mt)
Japan
SE Asia
Japan
South Korea
China
SE Asia
0
30
60
90
120
150
0
2
4
6
8
10
Wheat imports (Mt)
Sources: USDA, NAB Economics
Imports as a share of market demand (%)
Imports (LHS) Share (RHS)
SE Asia the big growth driver, wheat demand and imports in Japan and China marking time
National Australia Bank – Group Economics | 28
Role of policy – Australian grain exports rise to feed Chinese cattle
• Promoting self sufficiency in basic grains is a keystone of Chinese farm policy and this is achieved by a mix of border protection (quotas to ensure imports of rice, wheat and corn above quite low levels face high tariffs) and price support for Chinese farmers growing basic grains.
• These price supports have been a little too effective with huge amounts of corn and wheat ending up in government stockpiles as the support prices have been set so high they encourage over-production of low quality grain and encourage grain consumers to shift to cheaper substitutes where possible.
• Feed grains have seen most of this substitution away from high priced Chinese corn toward sorghum and feed barley, which have not been limited by import quotas as wheat and corn have. Australian exports of alternative feed grains have risen sharply in response to these distortions produced by Chinese farm policy but changes to corn support systems could curb the growth prospects for this trade.
0
100
200
300
400
500
0
100
200
300
400
500
2005 2007 2009 2011 2013 2015 2005 2007 2009 2011 2013 2015
Wheat prices (US$/t)
Sources: FAO, NAB Economics
Heibei
Maize prices (US$/t)
Jiangsu
Shandong
Jilin
World price (US Gulf)
China
World price (US Gulf)
0
2.5
5
7.5
10
12.5
15
0
5
10
15
20
25
30
2000 2003 2006 2009 2012 2015 2001 2004 2007 2010 2013
Barley imports (Mt)
Sources: USDA, NAB Economics
Sorghum imports (Mt)
Other
China
Middle East
North America
Mexico China
Other
Africa
China looms larger in global feed grain markets
0
250
500
750
1000
0
500
1000
1500
2000
2005 2007 2009 2011 2013 2015 2005 2007 2009 2011 2013 2015
Barley exports ($ million) Sorghum exports ($ million)
ASEAN
China & Hong Kong
Sources: ABS, NAB Economics
Japan
Korea & Taiwan
Japan China/ HK
ASEAN Korea & Taiwan
Chinese policy measures keep domestic wheat and corn prices well above world market levels
Australian barley and sorghum exports to China have risen as consumers seek cheaper alternatives
National Australia Bank – Group Economics | 29
Role of policy – Australian cotton exports to China crash
• China is a major player in global textile fibres trade as it is easily the biggest global wool processor and until a couple of years ago it was also the world’s biggest cotton importer.
• Rising labour costs have seen Chinese cotton spinners losing competitiveness against rivals in SE Asia and the Indian sub-continent. The outcome has been a drop in Chinese cotton demand, growing yarn and cloth imports from lower cost suppliers like Vietnam and a lift in the technology and quality of Chinese mills seeking to compete.
• The sudden downturn in Australian exports of cotton to China was not, however, due to these long run structural factors – the combination of lower Australian cotton output and Chinese farm policy. Like grains, China held internal cotton prices above world levels to support farm incomes and the outcome was cotton piling up in government stocks and growing volumes of cheaper imports.
• Changes in government policy involved reduced subsidies to some growers as well as restrictions on cotton imports, the outcome has been a modest drop in stocks but imports are only a fifth of their peak in 2010/11.
0
500
1000
1500
2000
2500
3000
3500
4000
0
500
1000
1500
2000
2500
3000
3500
4000
2002 2005 2008 2011 2014 2002 2005 2008 2011 2014
India
Wool exports ($ million)
Sources: ABS, NAB Economics
China
Cotton exports ($ million)
Other
Viet/Thai/Indon/Bangladesh
China
Japan/Korea/Taiwan
Other
Japan/Korea/Taiwan
-6000
-4000
-2000
0
2000
4000
6000
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Chi
na
Thai
lan
d
Mal
aysi
a
Ind
ia
Ind
ones
ia
Vie
tnam
Paki
stan
Ban
gla
des
h
Chi
na
Paki
stan
Mal
aysi
a
Thai
lan
d
Ind
ones
ia
Ban
gla
des
h
Vie
tnam
Ind
ia
2004
Hourly labour costs (US$/hr)
Sources: Werner International, USDA, NAB Economics
1990
1998
Cotton consumption (kt) - 2011-2015
2014
0
500
1000
1500
2000
2500
3000
0
500
1000
1500
2000
2500
3000
2002 2005 2008 2011 2014 2002 2005 2008 2011 2014
China cotton yarn imports (kt)
Sources: CEIC, NAB Economics
Vietnam - knitwear
Vietnam - textiles
Thailand - textiles
China textile imports (US$ million)
Indonesia - textiles
Rising wage costs has resulted in China losing competitiveness in basic textiles
China’s imports of yarn and textiles growing fast, particularly from lower cost near neighbours
Australian wool exports stay around $3 billion, cotton trade falls heavily as Chinese policy shifts
National Australia Bank – Group Economics | 30
(c) Tough competition in Asian food markets
0
50
100
150
200
0
200
400
600
800
2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015
China wholemilk powder imports (kt)
Sources: CLAL, NAB Economics
China infant formula imports (kt)
European Union
New Zealand
Australia
Americas Singapore
0
100
200
300
400
500
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Chinese beef imports (kt, 12 months ended)
Sources: CEIC, NAB Economics
Uruguay
Brazil
China & Hong Kong Australia
New Zealand
Canada
Argentina
Mexico $58m
Other $210m
USA $1262 m
New Zealand $43 m
Hong Kong $1090 m Chile
$753 m Vietnam $693 m
Sources: UN Comtrade, NAB Economics
USA $324 m
Philippines $309 m
Thailand $393 m
China $288 m
Thailand $274 m
South Africa $223 m
New Zealand $139 m
Australia $170 m
2014 China fruit imports (US$4.3b) 2014 HK fruit imports (US$2.8b)
Ecuador $130 m
Peru $87 m
Indonesia $54 m
Australia $50 m
Other $349 m
Peru $103 m
Chile $94 m Philippines
$44 m
• While rising incomes and dietary change underpin rising demand for the foods Australia exports and free trade agreements improve market access, it is still necessary to out-compete rival suppliers to lift sales.
• Even in those areas where free trade agreements have substantially improved access, notably meat, dairy and fruit, there is tough competition from rival suppliers like New Zealand and Chile who also have extensive networks of free trade agreements across East Asia.
• Chile and Peru offer stiff competition in markets like Chinese fruit as low cost efficient out of season suppliers with free trade access. Brazil and Uruguay are already supplying cheaper beef to the Chinese market than Australia. New Zealand is in a similar position in key dairy markets.
• This highlights the importance of maintaining cost competitiveness and product quality for Australian producers, linking to the need to improve distribution and transport systems and keep production costs down.
Australia has significant beef exports to China, but South American competition is growing
New Zealand and the EU swamp Australia in key dairy market segments in China
Australia’s share of China’s fruit imports is modest, even through the Hong Kong channel
Services and manufacturing – lower $A brings competitive gains and trade responds
National Australia Bank – Group Economics | 32
Deflating commodity boom cuts $A, helps competitiveness
• The $A has fallen considerably against key Asian currencies like the RMB and Won but less so against the Yen. These currency shifts are part of a broader decline in the $A trade weighted basket that has improved the competitiveness of Australian suppliers in global markets.
• During the mining boom, exceptionally high resources prices drove the terms of trade to multi-decade highs and the associated lift in the $A took our cost competitiveness to its worst since the mid-1970s.
• Inevitably, that loss of competitiveness hit non-commodity sectors like services and manufacturing, triggering a series of major factory closures that have eroded industrial capacity and a pause in the multi-decade growth trend in exports of services and non-metal manufactures.
• $A depreciation and improved competitiveness have resulted in a surge in total service sector export volumes but volumes of non-metal manufactures have levelled out rather than picked up – possibly reflecting earlier losses in industrial capacity.
0
25
50
75
100
125
150
175
0
50
100
150
200
250
300
350
Mar-80 Sep-92 Mar-05 Sep-80 Mar-93 Sep-05 Jun-81 Dec-93 Jun-06
Resource prices Terms of Trade Competitiveness
Worse Better
Index Index
Sources: RBA, ABS, NAB Economics
0
2
4
6
8
10
12
14
16
18
0
1
2
3
4
5
6
7
8
9
1974 1983 1992 2001 2010 1977 1986 1995 2004 2013
Non-metal manufactures exports ($ billion)
Sources: ABS, NAB Economics
Services exports ($ billion)
0
50
100
150
200
1970 1979 1988 1997 2006 2015 1977 1986 1995 2004 2013
Australian currency indices (Mar-05 =100)
Sources: Datastream, CEIC, NAB Economics
Chinese Yuan
Japanese Yen
Trade weighted index
Competitiveness
South Korean Won
Higher A$ Worse Competitiveness
Post-commodity boom exchange rate more favourable for other exports to key markets
Surging commodity prices from the early 2000s had a significant impact on Australian competitiveness
Non-metals and services suffered during the commodity boom; service exports now starting to trend up again
National Australia Bank – Group Economics | 33
Services exports to East Asia rising fast, focus very much on Chinese visitors
0
1
2
3
4
5
2000/01 2004/05 2008/09 2012/13 2000/01 2004/05 2008/09 2012/13
ou
sad
s
Other East Asia
China
Business services exports to East Asia (A$ billion)
Sources: ABS, NAB Economics
Japan
Hong Kong
South Korea & Taiwan
Other ASEAN
Singapore
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
0
2
4
6
8
10
12
14
16
China Japan Other China Japan Other
Other
Services export values ($A billion)
Sources: ABS, NAB Economics
Education
Business services export values ($A billion)
Tourism
Other business services
Finance Telecoms & IT
0.0
2.5
5.0
7.5
10.0
12.5
15.0
0
5
10
15
20
25
30
2000-01 2004-05 2008-09 2012-13 2000-01 2004-05 2008-09 2012-13
Other East Asia
China
Services exports to East Asia (A$ billion)
Sources: ABS, NAB Economics
Japan
Hong Kong
South Korea
Taiwan, HK
ASEAN
Services exports to East Asia (A$ billion)
Total Other East Asia
• Japan was Australia’s biggest East Asian service market in 2005 but by 2014/15 services earnings from China were 4 times greater than from Japan. Exports to China climbed from $6 billion in 2010/11 to $9 billion in 2014/15 while those to ASEAN increased from $8 billion to $10 billion. By contrast, services exports to Japan fell slightly to just over $2 billion during that period and earnings from the South Korean market slipped too.
• The bulk of Australian service sector earnings are provided to visitors coming here to study or holiday rather than the offshore operations of Australian businesses, important though these are. While business service earnings from East Asia are rising, by far the biggest single component of our services exports is the $7¾ billion spent by Chinese visitors to Australia.
China and ASEAN have driven growth in Australian services exports, while Japan has stagnated
China’s service imports are mainly travel related, while business services are important to ASEAN…
…with Singapore the key market
National Australia Bank – Group Economics | 34
Travel receipts surge underpinned by tourism and education
• $A depreciation, particularly against the RMB, has cut the cost of holidaying here and further fuelled the surge in visitor numbers coming from China. Short term visitor arrivals from China have doubled over the last 4 years, now running at an annual rate of over 1 million visitors and getting close to displacing New Zealand as the biggest source of arrivals.
• China has displaced Japan as the biggest East Asian source of visitor numbers and spend. The long period of disappointing economic performance in Japan, the lack of wage growth and the persistently weak yen against the $A have all contributed to a near halving in visitor numbers and spending over the last decade. Visitor numbers from ASEAN have also risen heavily, almost doubling since 2006.
• Contrasting experience between China and Japan shows how diverging macro-economic performance drives discretionary spending like international travel and highlights the importance of continued household income growth in China.
80
100
120
140
160
180
200
220
240
2000 2003 2006 2009 2012 2015 2001 2004 2007 2010 2013
South Korea
Index of costs to foreign travellers for visiting Australia (Jan-00 = 100)
Sources: Datastream, NAB Economics
China Singapore
Indonesia
Japan Malaysia
More expensive
0
20
40
60
80
100
120
140
160
180
2005 2007 2009 2011 2013 2015 2005 2007 2009 2011 2013 2015
Emerging markets
Monthly short term visitor arrivals (000s, sa)
Sources: ABS, NAB Economics
China
United States
New Zealand
Japan United Kingdom
0
200
400
600
800
1000
0
100
200
300
400
500
2006 2008 2010 2012 2014 2007 2009 2011 2013 2015
Number of holiday visitors (000s)
Sources: ABS, NAB Economics
China
Spending ($m)
Japan
China
Japan
Chinese visitor numbers to Australia have surged across the past decade – now second behind NZ (and closing)
Depreciation of the A$ has made Australia a cheaper favourable destination for a range of Asian nations
China has overtaken Japan in both the number of holiday visitors and the level of spending
National Australia Bank – Group Economics | 35
Manufactured exports hit by tough business environment
• The combination of weak growth in East Asian trade and the high $A during the mining boom have taken their toll on Australian exports of non-metal manufactured goods to the region. The $A value of exports stagnated between 2013 and late 2015, despite the $A depreciating over that period, which increased prices for manufacturers and boosted earnings.
• Stable export values combined with rising export prices imply that the export volume of non-metal manufactures to East Asian markets has been falling. Normally the lift in competitiveness associated with the weaker $A would lead to a lagged increase in export volumes and there are a few signs that this could have started in the latter half of 2015.
• Industrial output has fallen from its mid-2008 peak by around 15% in Australia and there has been a serious erosion of the industrial base as major plants and industries have either closed or are winding down. That could well limit the extent to which exports can respond to the lower A$.
60
70
80
90
100
110
120
130
140
-40
-30
-20
-10
0
10
20
30
40
1990 1995 2000 2005 2010 2015 1993 1998 2003 2008 2013
% yoy
Sources: CPB, Datastream, RBA, NAB Economics
Exports
Index (Jan 05 = 100)
Exchange rate (TWI)
Competitiveness
Imports
Higher currency Worse competitiveness
East Asian Emerging Markets
0
2
4
6
8
10
12
2005 2007 2009 2011 2013 2015 2005 2007 2009 2011 2013 2015
HK, Taiwan, South Korea
China
Exports by market (A$ billion)
Sources: ABS, NAB Economics
Japan
Exports by product (A$ billion)
China
Other
Chemicals
ASEAN
Machinery and transport equipment
80
100
120
140
160
180
200
-30
-20
-10
0
10
20
30
2005 2007 2009 2011 2013 2015 2005 2007 2009 2011 2013 2015
% yoy (3mma)
Sources: ABS, Datastream, NAB Economics
Export prices
Index (Jan-05 = 100)
Exchange rate
Export volumes
Export values
Lower $A lifts export prices but volumes have been weak following closures
Unfavourable environment for manufactured exports into East Asia, but competitiveness improving with the exchange rate
Export values stagnated to East Asia as domestic producers lost competitiveness
National Australia Bank – Group Economics | 36
Wine – China leads the way in region wine demand
• China is one of the world’s biggest wine markets, the fourth biggest market in 2014 and with a record of strong trend growth. There is also ample scope for wine consumption to keep climbing as rising incomes boost the number of middle class consumers.
• Australia has become a major supplier to China, raking fourth overall in 2015 volumes (behind France, Chile and Spain) but second only to France in bottled wine imports. Chile dominates the low value bulk wine trade and out of Australia’s $370 million wine exports to China in 2015, only $13 million were bulk – the rest were bottled. Mainland China ranks fifth as an Australian export market but including Hong Kong, it comes first with $500 million in 2015 exports.
• Even though wine is a differentiated branded manufactured good, Australian exports still suffered heavily during the period of $A strength in the commodity boom. Modelling from Adelaide’s Wine Economic Research Centre shows the strong impact of currency driven changes in competitiveness on Australian wine export volumes.
Link between income and wine consumption affected by cultural factors at regional level
0
600
1200
1800
2400
3000
0
200
400
600
800
1000
2005 2007 2009 2011 2013 2015 2005 2007 2009 2011 2013 2015
Australian alcohol exports ($ million)
Sources: ABS, CEIC, NAB Economics
Chinese imports (US$ million)
Japan
Beer
Wine
Korea & Taiwan
China & Hong Kong
ASEAN
0.0
0.2
0.4
0.6
0.8
1.0
0.0
0.5
1.0
1.5
2.0
2.5
1995 1998 2001 2004 2007 2010 2013 1995 1998 2001 2004 2007 2010 2013
Wine consumption (Ml)
Sources: The Wine Institute, OIV, NAB Economics
Wine imports (Ml)
Hong Kong
China
Japan
Korea & Taiwan
China
ASEAN
Hong Kong
Japan
Korea & Taiwan
ASEAN
Hong Kong
Australia
Taiwan
Japan
S Korea
New Zealand
Malaysia
China Indonesia
Thailand
Philippines Cambodia
Laos
Vietnam
0
5
10
15
20
25
30
0 10000 20000 30000 40000 50000 60000
Wine consumption per capita (2014 litres)
Sources: The Wine Institute, NAB Economics Annual income per capita (PPP$)
China now easily our biggest alcohol export market in East Asia – led by wine
China easily Asia’s biggest wine market, with imports rising in recent years
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