Commodity Price Strength a Boon for Local Economy

Confirmation on Friday that the three months to March saw Australia enjoy one of the strongest quarters on record for commodity income and our terms of trade.

The Reserve Bank’s Commodity Price Index hit a new all-time high in the month of March of 151.9. In Australian dollar terms it was up 3.9% in the month, more than 15% for the quarter and a huge 42% for the year to March 31.

The Commodity Price Index is a rough proxy for our terms of trade on the export income side. A sharp and continuing rise in import costs will take much of the rise, but the RBA index suggests that the March quarter national accounts in early June will show a rise in our terms of trade and national income.

The December quarter saw the index rise by just over 11% in $A terms while our terms of trade fell 5.1% according to the national accounts for the quarter.

The March performance followed a small fall in Australian dollar terms as the boost to commodity prices from the Russian invasion of Ukraine on February 24.

The real gain in commodity prices – especially gold, lithium, oil and gas and especially thermal coal came from the first week of March after President Putin appeared not to rule out the use of nuclear weapons.

The gain in March was widespread with the Reserve Bank noting that the rural, non-rural and base metals indices all increased in the month and like the overall index, hitting record levels.

The performance would have looked far better in the first two weeks of the month after there was a definite cooling in the final 10 days of March as oil, gas and coal prices all fell sharply.

That’s why the April index in a month’s time won’t show as big a monthly rise. March’s rise though is likely to end up higher as a more accurate reflection of current prices

“…preliminary estimates for iron ore, coking coal, thermal coal and LNG export prices are being used for the most recent months, based on market information.

“Using spot prices for the bulk commodities, the index increased by 13.9% in March in SDR (Special Drawing Rights) terms, compared to the 8.4% rise in SDR terms based on a monthly average basis.

On an annual basis and using the monthly average, the index was up 40.9% over the past year but the RBA pointed out that using spot prices the rise was 66.3% higher over the past year. That suggests the actual strength of the rise will be revised higher in coming months.