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Global commodity prices have surged to all-time highs due to the ongoing Russia-Ukraine conflict as the supply outlook for critical commodities ranging from industrial metals to grains has grown uncertain.
The price shock, combined with Western sanctions on Russia, has prompted commodity importers to withdraw from the disputed region and look elsewhere. This significant shift in trade flows is likely to have an influence on Australia, which has plentiful supplies of natural resources. As per official figures, Australia was the world’s largest exporter of metallurgical coal and iron ore in 2020, the second-largest exporter of thermal coal, and the third-largest exporter of uranium.
Australia’s export-oriented economy is well-positioned to more than double its primary commodity exports thanks to rising global demand. Australia’s commodity-led growth has already led to a jump in earnings projections in 2022, followed by a better-than-anticipated February earnings season. As per Bloomberg, profit estimates for Australia’s S&P/ASX 200 Index have risen by 10% in 2022, much higher than predictions seen for United States’ S&P 500 Index and Japan’s Topix.
According to Craig James, chief economist of Commonwealth Bank’s securities division, “materials and energy producers were among the companies that outperformed analysts’ estimates while managing rising costs.”
Australia aims to bank on commodity supply chain shifts
Analysts are anticipating Australian exports to jump significantly in 2022, on the back of rising demand for commodities. The country has already announced its plans to capture new coal demand from European consumers who seek alternatives to Russian suppliers. Federal Minister for Resources and Water, Keith Pitt, told media, “Recent requests from Poland to Australia for coal from sources alternative to Russia show the world is increasingly looking to Australia for the resources needed to provide energy security.”
Following the development, the commodity-linked Australian Dollar has risen to a new yearly high of $0.7445 on March 8, exceeding last Friday’s high of $0.7374 and breaking January’s record of $0.7314. The currency hike was also backed by Australia’s trade surplus, which rose to a record high of A$12.9 bn ($9.39 bn) in January 2022, due to higher coal and iron ore earnings.
Pitt further validated coal’s ongoing dominance in Australia’s resource and energy export earnings. As per official figures, total coal exports for the 12 months to January 2022 jumped 60% y-o-y to A$67.42 bn ($49.39 bn). Meanwhile, total resources and energy exports rose 29% y-o-y to A$356.5 bn ($261.8 bn) during the same period.
“Records will be broken in coming months if prices are sustained,” said Taylor Nugent, an Economist at NAB, who expects coal and LNG exports to double from their present monthly value by April or May. As per the expert, the recent pricing movements hint at a 30% increase in Australian export revenues by March.
In its March outlook, Fitch Ratings has forecasted Australia’s export growth to revive in 2022, rising 5.0% from a contraction of 1.8% in 2021. The rating firm also increased Australia’s 2022 real GDP growth forecast to 4.3% from 3.5% previously, citing better-than-expected growth in Q421. It expects service exports to increase following Australia’s decision to open borders to fully vaccinated international visitors from February 21, 2022.
Citing an improved export outlook for Chinese demand, Fitch said, “In addition to favourable base effects, stronger infrastructure investment in China on the back of the government’s pledge to stimulate the economy will lift demand for iron ore and support iron ore prices.”
China consumes at least half of the world’s commodities supply. Despite deteriorating trade relations between the two, Australia’s economy is significantly dependent on China, its largest export market.
Impact of Russia-Ukraine conflict on Australia’s economy
If commodity prices continue to rise, Australia’s economic growth outlook could be dampened to some extent, suggest experts. Despite being a large commodity exporter, Australia is a net importer of crude oil and refined petroleum products. The country imports a considerable part of its refinery feedstocks, with only about 12% produced domestically. Australia is likely to face the brunt of the war and trade restrictions on Russia in the form of historically high oil prices, which could further jump to $185 per barrel by the end of this year, as per JP Morgan’s calculations.
Analysts now estimate average petrol prices to likely hit $2.10 a litre soon. Petrol prices are skyrocketing across the country and have already crossed $2 per litre for the first time on March 9, after reaching $1.95 per litre on February 23, a day before Russia invaded Ukraine.
John Quiggin from the University of Queensland told Xinhua that “every 10 U.S.-dollar increase per barrel in crude oil prices translates to about a 10-cent increase per litre of petrol prices in Australia.”
Furthermore, supply chain disruption and rising commodity costs have exacerbated global inflation concerns. If the scenario persists, interest rate hikes in Australia, as in other nations, are likely. In its latest February update, the Reserve Bank of Australia has kept its interest rate unchanged at record low levels. The RBA’s Governor Philip Lowe emphasised restraint in tightening policy, noting that “the war in Ukraine is a major new source of uncertainty.” However, according to a recent Reuters poll of economists, RBA could hike key lending rates by the third quarter of 2022.
Meanwhile, Australia has limited trade ties with Russia, according to Gareth Aird, head of Australian economics at Commonwealth Bank of Australia. The expert further anticipates Australia’s economy to be relatively immune to the war, “if the major military powers in Europe and the United States do not engage Russia in Ukraine or elsewhere.”
According to Aird, while there will be some challenges from the Russian invasion on the Australian economy, they are not big enough to modify central estimates for GDP, unemployment, wages, or underlying inflation.
