UBS: Australia's $2 billion trade deficit could be wiped within months

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Australia’s trade deficit continued to narrow in August.

And, if the recent surge in coal price is sustained, it could be wiped within months, say economists at UBS.

Here’s the bank’s Australian economics team, comprising George Tharenou, Scott Haslem and Jim Xu, explaining why:

Overall, the trade deficit continued its improving trend of recent months. Indeed, the massive spike in coal prices recently means export values will likely surge across September and October, which will narrow the trade deficit sharply further – albeit the extent is hard to quantify given the unclear relationship between spot, contract, and ‘received’ export prices. Nonetheless, with coal exports around ~$2.8bn per month – equivalent to a ~10% share of total exports – the price spike, if sustained over coming months, could potentially be large enough to wipe out the overall trade deficit by itself.

This chart shows the average Australian export price for iron ore, thermal and premium hard coking coal (which is up 130% in the past three months) reported by the ABS compared to recent movements for these commodities in spot markets.

The moves in spot prices have been truly enormous, particularly for hard coking coal.

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