Commodity Prices in Australia

Abstract:

Australia is a large exporter of commodities and hence the nation’s national income is affected by commodity prices. Australia can benefit from an increase in prices of commodity exports as well as a decrease in import prices. It is argued that the Australian dollar is a commodity currency, thus a decrease in the prices of commodities leads to a depreciation of the Australian dollar as well. Oil prices have a significant impact on the airline industry and lead to adaptations by airlines. Government spending should respond in prudent manner to a rise in commodity revenues.

        Table of Contents:

1. Australian Economy…………………………………………………………………...2
2. Key Industries……………………………………………………………………........3
3. Risks of commodity price shocks………………………………………...……………3
4. Effect on the GDP ………………………………………………………………….…5
5. a. Effect on the Import Export Industry ……………………………………….……...6

b. Airline Industry and Oil…………………………………………………………….6

c. Impact of the mining boom on the Australian tourism industry…………………….7

1. A Fluctuating Dollar.......................................................................................................8
2. Policy approaches of the government……………………………………………..…..9
3. Recommendation……………………………………………………………………10
4. Conclusion…………………………………………………………………….…… 11
5. References……………………………………………………………………..……12
6. Appendix………………………………………………………...……………...……14

1. Australian Economy:

The Australian economy is one of the fastest growing in the world with a GDP of US$ 1.5 trillion, as of 2014. It is dominated by the services sector which comprises 68% of its GDP, this includes education, tourism and financial services. Eastern Australia consists of the majority of firms in the services and financial industry. Western Australia has the nation’s natural resources, which include gold, iron ore, natural gas and oil. Recently the services and financial industry have been struggling while the commodities and resources sectors are experiencing a boom. The quarterly gross domestic product (GDP) has decreased in the period 2011-2014 as can be seen in the figure below (Reserve Bank of Australia 2015).

                                           Figure 1

[pic 1]

  Quarterly Change in GDP (2011-2014)

                                     Source: Reserve Bank of Australia, 2015

Regions of the country endowed with oil, gas and mineral have higher growth. There are ongoing concerns about the reliance of the commodities and resources sector on Chinese exports. The unemployment rate was 6.3% as of December 2014. The Australian Securities Exchange is based in Sydney and is ranked 9th in terms of world market capitalization. The nation is home to some of the largest firms in the world including BHP Billiton, Rio Tinto and National Australia Bank (Australia Economy, 2015).

1. Key Industries:

[pic 2]

                                                                            Source: Deloitte 2015

The key industries include:

• Agribusiness: As the prices of commodities increase, it is highly beneficial for the agribusiness industry as there is an increase in the revenue generated.
• Gas: Due to plunging oil prices as has been seen recently, gas prices have also gone down. This has an impact on the spending choices of individuals and decisions taken by firms.  
• Tourism: Due to the boom in the mining industry, there has been an increase airline transport. Workers are having to travel more to regional areas and this has been beneficial for the tourism industry. 
• International Education: Commodity prices do not directly impact the international education industry. However there is an indirect ripple effect due to the fluctuating dollar as a stronger Australian dollar makes it difficult for foreign students to study in the country.
• Wealth Management: Commodity prices do not have a direct effect on the wealth management industry. There is an indirect ripple effect due to the fluctuating dollar, a stronger Australian dollar makes it difficult for foreign investors.

1. Risks of commodity price shocks:

Australia is a large exporter of commodities and hence the nation’s national income is affected by commodity prices. Increasing prices of commodity exports since 2002 are a positive factor for the economy of the nation. As the growths in prices of exports have exceeded the growth in prices of imports, the terms of trade have become high. There is a question regarding whether the gains are due to cyclical factors or they actually represent a shift to a high level of national income. As can be seen from the figure below, commodity prices have increased considerably till the year 2011 after which they have started decreasing (Knop & Vespignani 2014).

     Figure 2

[pic 3]

Commodity prices may rise if there are short term disruptions in supply. In the case of Australia, a major drought led to decreased agricultural output, and this contributed to high world and domestic agricultural commodity prices. Disruptions due to weather affected the output of the Australian mining industry, which led to an increase in prices of iron ore and coal. Increasing prices of commodities have made a smaller contribution to Australian economic growth than what is generally assumed. This is because there has been subdued growth in commodity output as well as export volumes. Supply constraints like the drought have had an impact on export volumes. The boom in commodity prices have coincided with trade deficits, as weak export volumes have offset the strength in prices of exports (Kirchner 2009).