Commodity Prices Tumble in Australia as Credit Crisis Bites | Voice of America - English
Australia's economy has enjoyed years of solid growth thanks to a booming resources sector. Now, the good times appear to be fading as the global credit crisis affects China's appetite for Australian iron and other minerals.
As the world economy tumbles, commodity prices have also fallen sharply. Shares in Australian mining giants, BHP Billiton and Rio Tinto, have plunged. It has been a spectacular fall for a sector that until recently had enjoyed record-breaking prices. Matthew Smith, an economist at the University of Sydney, expects worse to follow. "What we've seen at the moment there's clearly been a lot of speculative activity in commodities partly because of the credit boom as well and that is now going to disappear and you'll see prices immediately fall, I think," Smith said. "They will fall further as the demand for these commodities will fall. So, yes that will tend to bring down price inflation." The inflation rate measures changes in the cost of living and in the prices of goods and services. In Australia it stands at 4.5 percent a year, which is much higher than the country's Reserve Bank would like. The Asian Development Bank estimates that average inflation across Asia has increased to seven-point-eight percent in 2008 - the highest in more than a decade. Falling commodity prices should help to bring inflation down but Smith thinks that other economic factors in Australia could temper falls in the cost of living. "There is one thing though and that is the exchange rate in Australia has fallen considerably by about 25 percent over the last month," Smith said. "So, that will feed into higher import prices and so that will mean that there will be some consumer goods that will be higher. (The) cost of living will remain fairly high for a period of time before it starts subsiding and settling down." A weaker Australian dollar also keeps the benefits of falling oil prices from being passed onto drivers. World grain prices also have been tumbling from the highs of early this year, but from Manila's food stalls to Sydney's supermarkets, consumers are not yet seeing lower food prices. There have been serious supply problems in global agriculture, including storms that have hurt the rice crop in Southeast Asia, and a drought in Australia that has hampered the harvest. Analysts fear that farmers, frustrated by falling prices and credit shortages, will plant less. Luke Chandler, from Rabobank Australia, thinks the commodity market turbulence will continue. "The commodity markets have really been battered by the uncertainty we've had in the broader economy," Chandler noted. "And it's really going to take a period of adjustment until we get some relative stability in these financial markets so that we can see a turnaround in the confidence of traders and investors to step back into the markets." There is some optimism for the Australian resource market. Industry experts think that while exports of commodities to China will suffer in the short-term, the situation further down the track is much brighter, which will help to insulate Australia from the worst effects of the global slowdown. Market analyst Peter Arden says that Asia's demand for Australian minerals will recover. "The world has grown a lot bigger over that decade and still needs minerals to replace ones that have been mined out of traditional deposits," Arden said. "So, the sector still has a very robust condition about it and it still will enjoy very good times because at the end of the day, in our view, the industrializations and particularly urbanizations going on in India and China are very long-run things that support long-term commodity demand." In the meantime, the Australian government this week announced an unprecedented package to help the economy ride out the global downturn. The plan will use about $6.7 billion to stimulate demand by giving cash handouts to retirees, first-time home buyers and others with low incomes. Prime Minister Kevin Rudd hopes the money will keep the economy afloat during these troubled times. "What began as a patch of bad weather in America has now become a cyclone that has threatened to engulf the world," Rudd said. "But my message to the nation today is that while these winds of ill-fortune have battered institutions and shattered confidence across the world, the Australian financial system remains strong. Our economy remains strong." It is, though, likely to become sluggish. While any falls in inflation and interest rates, will be good for consumers, an economic downturn will almost certainly cost jobs. Australia, like other countries in the Asia-Pacific region, may escape the worst of the global financial meltdown, but it will suffer economic pain.