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Australia Trade Deficit Drops, Surplus on Horizon

Australia's trade deficit shrank by far more than expected to its smallest in 14 months in April fuelling speculation that surging prices for coal and iron ore exports could make deficits a thing of the past.

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AP

Thursday's report from the government showed the deficit for goods and services narrowed to A$957 million ($911 million) in April, down sharply from A$2.55 billion in March and well under forecasts of A$1.7 billion.

"We could well see a trade surplus in the next few months," said David de Garis, a senior economist markets at nabCapital. "There are huge increases in iron ore and coal prices to come while imports should be limited by subdued domestic demand."

That would be a marked turnaround for Australia, which has not seen a monthly surplus since March 2002.

Imports fell 2.2 percent seasonally adjusted to A$21.4 billion in April. Imports of consumption goods were down 6 percent due mainly to a big drop in cars.

That should be a comfort to the Reserve Bank of Australia (RBA) which has lifted interest rates twice this year in an attempt to cool consumer demand.

Exports climbed 5.8 percent to A$20.45 billion, driven by a 23 percent jump in coal and coke earnings as mines recovered from bad weather delays. Farm exports enjoyed a 6 percent increase, and there was a notable rise in pharmaceutical exports as well.

The Australian Bureau of Statistics said it had not adjusted prices for iron ore exports in April as contract negotiations between the big miners such as BHP Billiton and major customers like China had yet to be settled.

These talks are likely to see a huge rise in iron ore prices which will be back-dated to April. As a result, the ABS expected the value of iron exports in April to be revised upward once the contracts were settled.

Red Hot

Red-hot demand from China and India coupled with tight supplies are expected to see contract prices for coking coal jump around 200 percent this year, while steaming coal is seen up around 125 percent and iron ore perhaps as much as 85 percent.

Coal and iron ore are Australia's two biggest exports and such price increases could add anywhere from A$45 billion to A$55 billion to Australia's export earnings in the year ahead, potentially wiping out the country's trade deficit.

However, the trade boom will complicate life for the RBA as it battles to cool the economy and contain inflation, which hit a 17-year high last quarter.

The central bank has already had to double its estimate for this year's rise in Australia's terms of trade -- what it gets for exports compared to what it pays for imports -- to 20 percent. And that follows a 40 percent rise in recent years.

Thus while the RBA kept interest rates steady at a 12-year peak of 7.25 percent at its monthly meeting this week, it also warned that it would hike again if the trade boost rekindled domestic demand later in the year.

"The details of today's trade report highlight the dilemma for the RBA at present," said Su-Lin Ong, a senior economist at RBC Capital Markets.

The jump in key commodity prices would deliver substantial export income for the nation, but the fall im imports shows that higher rates are having an impact on household consumption.

"It is the soaring terms of trade which may prove most challenging," she added. "The structural shift up in the terms of trade, underpinned by the industrialisation of China, suggests the neutral level of cash rates may now be structurally higher."