Australia Trade Deficit Widens; Iron Ore to the Rescue

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Australia's trade deficit in November widened to its largest since early 2008 as imports again outpaced exports, though a recent meteoric rise in the price of iron ore suggests the worst of the trade pain is over for the resource-rich nation.

The deficit on goods and services grew to A$2.64 billion ($2.8 billion) in November from A$2.4 billion the month before, data from the Australian Bureau of Statistics showed on Tuesday.

That was the 11th straight month of deficit and was above forecasts of A$2.3 billion. Yet Chinese demand for iron ore has seen prices for Australia's single biggest export earner rebound no less than 77 percent from lows hit in September to reach $153.90 a tonne this week.

The steel-making mineral is worth more than A$60 billion a year to Australia, so the recovery is a much-needed boost to profits, investment and tax receipts.

"The marked rise in iron ore values coupled with higher export volumes should give a double boost in December, so this looks like being the worst of the deficits," said Michael Workman, a senior economist at Commonwealth Bank of Australia.

"The deficits could halve from here if prices stay remotely near where they are now," he added. The need to offset the drag from trade last year was a major reason the Reserve Bank of Australia (RBA) cut interest rates in October and December, matching the record lows of 3 percent set during the global financial crisis. Markets suspect rates might still ease further, but perhaps not by much should iron ore prices hold their gains and the Chinese economy continue to improve.

Australia's Labor government has also abandoned its goal of achieving a budget surplus by June, so lessening the fiscal pressure on the domestic economy.

As a result, interbank futures now imply rates could bottom around 2.75 percent by April, up from a previous target of 2.5 percent. Swap rates put a 38 percent probability on a cut at the RBA's next policy meeting on Feb. 5.

Shipping More Iron Ore

Tuesday's data showed Australia's imports climbed 1.8 percent to a record A$27.3 billion, driven by purchases of cars and oil. Imports of capital goods plateaued for the moment after a very strong run, led mainly by heavy machinery for major mining and liquefied natural gas projects.

Total exports of goods and services rose 1.2 percent in November to A$24.7 billion, thanks largely to a 6 percent increase in earnings from metal ores and minerals.

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And those earnings should expand a lot more given the appetite from Chinese steel makers remains strong. Total exports to China increased by 13.5 percent in November, from October, to a five-month high of A$6.6 billion.

There were promising signs for December as well since shipments from Australia's busiest iron ore port, Port Hedland, hit record highs that month. Exports to China alone were up 25 percent on November and 22 percent on December 2011.

Analysts at Australia and New Zealand Bank estimate iron ore export volumes from Port Hedland rose 14 percent for the whole fourth quarter, compared to the same period of 2011.

The revival in iron ore should at least help stabilize the country's terms of trade, or the ratio of export to import prices, which had fallen for much of last year. And it is leading some miners to reinstate shelved investment plans.

Fortescue Metals last week said it would resume an iron ore expansion that was put on hold in September, aiming to raise capacity to 155 million tonnes a year.

"If the iron ore price were to persist around current levels this would by itself lead to favourable revisions to a range of economic forecasts," sa