Australia Floods Boost World Commodity Prices
Australia's economy has generally outperformed those of other developed nations during recent downturns. It has managed this partly on the strength of its commodity exports, from iron ore to cotton. But disastrous floods in northeast Australia have hurt production and caused global commodity prices to spike.
As Australia's third-largest city, Brisbane, dries out from what some locals call "The Big Wet," Australia is tallying the economic losses. Some Australian media have speculated that the damage may be greater than what Hurricane Katrina inflicted on the U.S. economy in 2005.
Professor John Rolfe specializes in Australia's resources economy at the University of Central Queensland. He says it's not just the total cost of the disaster that matters, but its impact on the larger national economy.
"I think that Hurricane Katrina had a very big impact," he concedes. "But I think what is true here is that this shock would be a larger shock to the Australian economy proportionally than Katrina was to the American economy."
The reason is that the state of Queensland has a dominant proportion of some of Australia's most valuable commodities. Many of these are sold to China, whose voracious demand for resources has driven commodity prices up, Rolfe says.
"Commodity prices are very important to Australia," he points out. "We are in the fortunate position of having a lot of coal to sell and a lot of iron ore to sell, again because of the China growth, and that's really driving the national economy."
Spot prices for coking coal, which is used to make steel, are up 10 percent in the past month. They're expected to spike higher while Queensland coal mines are furiously pumping floodwaters out of their pits.
This will take time, says Brian Redican, a senior economist at the Macquarie Group in Sydney.
"That could take up to three months or even longer before those coal mines are ready to go back into production," he says. "And Queensland controls maybe half of the ocean-going, traded coking coal market. So that's a lot of supply that's been removed from the global market at the moment."
Redican notes that other coking coal producers, including Indonesia and the U.S., are profiting from the short supplies.
"All those other suppliers that have been playing second fiddle to Queensland in recent years will now really be able to take advantage of those high prices and provide a much more important source of supply for the global market."
The Reuters CRB index of 19 commodity prices is up 29 percent since last July, the highest level since the global recession began. There is also concern about inflation and food shortages.
Australia is a major exporter of agricultural commodities, including wheat, sugar and cotton. But Tracey Allen, a Sydney-based commodities analyst at Rabobank, which finances agribusinesses, notes that Queensland does not dominate Australia's production of those crops.
"The reduction to cotton production Australia-wide is really about at an 8 percent sort of level," she says. "So it is a very significant downgrade up in Queensland, but when you consider production on a national level, we are still predicting a record crop issue, with record production at about 3.95 million bales."
One upside of the slowdown in Queensland's commodity exports is that the Australian dollar may edge lower in value, and that could give foreign consumers a better deal on, for example, a case of Australian cabernet sauvignon, or a safari in the Outback. Copyright 2011 National Public Radio. To see more, visit http://www.npr.org/.