Japan

Impact on Australia’scommodity exports

The impact of low and expectedcontinuing low growth in Japan

for Australia’s commodity exports

ABARE information paper

June 1998

ABARE 1998, The Impact of Low and Expected Continuing Low Growth inJapan for Australia’s Commodity Industries, ABARE Information Paper,June.

Australian Bureau of Agricultural and Resource EconomicsGPO Box 1563 Canberra 2601

Telephone +61 2 6272 2000 Facsimile +61 2 6272 2001Internet www.abare.gov.au

ABARE is a professionally independent government economic research agency.

ABARE project 1190

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Contents

Japan and Australia 1

Macroeconomic outlook for Japan 2

Japanese economic growth: implications for Australia’sagricultural and resource commodities 6

Overview: impacts on Australia’s commodity exports 10

Agricultural products 11

Wheat 11Wool 11Cotton fibres 12Beef 13Sheepmeat 13Dairy 14

Forest products 16

Australian woodchip exports to Japan 16Implications of continuing low growth in Japan 16

Fisheries products 18

Minerals 19

Iron ore and steel 19Aluminium 20Copper 21Lead 22Zinc 23

Energy 25

Coal 25Oil and gas 26

Japan and Australia

Japan’s economy has entered a period of renewed uncertainty. Over the pastyear, it has experienced a series of destabilising events including sharp fiscalcontraction, financial market instability and the collapse of several financialorganisations. Private sector activity, especially private consumptionexpenditure, remains weak. Export performance has been holding up, but thereare now concerns about the impact of recent financial upheavals in SouthKorea and South East Asian countries (namely Thailand, Indonesia, Malaysiaand the Philippines) on demand for Japan’s exports.

Economic developments in Japan have important implications for Australia.A significant proportion of Australia’s commodity exports go to Japan. Forexample, in 1996-97, Japan accounted for around 17 per cent of agriculturalexports, 17 per cent of mineral exports and 31 per cent of energy exports fromAustralia.

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Macroeconomic outlook for Japan

One feature about current world economic developments is the diversity ofeconomic strength in major economies. While economic growth remainsstrong in the United States and is strengthening in western Europe, the shortterm outlook for Japan has weakened (table 1).

The monetary and fiscal stimulus applied to the Japanese economy during1995 provided a boost to economic growth in 1996. However, economicactivity has weakened significantly since mid-1997 due mainly to thetightening of fiscal policy since April 1997 and the recent instability in Japan’sfinancial sector. Key elements of the fiscal tightening included an increase inthe consumption tax from 3 to 5 per cent and the removal of temporary incometax reductions introduced in 1994. Following a significant decline of stockmarket prices, a number of financial organisations collapsed in late 1997.Japan’s economy contracted, seasonally adjusted, at a rate of 0.4 per cent inthe December quarter 1997. A further contraction of 1.3 per cent in the Marchquarter 1998 confirms that Japan is now in recession.

Partial indicators and business surveys released recently indicate thatconsumer and business confidence remains weak. Export performance,nevertheless, is holding up. Although exports to South Korea and South East

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1 World economic growth assumptions

Country/region 1997 1998 1999 2000–03

% % % %

World 4.1 2.5 3.2 3.5

OECD 2.7 2.4 2.4 2.3United States 3.8 2.8 2.2 2.0Japan 0.9 –0.7 1.0 2.0Western Europe 2.4 2.7 2.8 2.5

East Asia a 5.3 –1.5 2.6 4.9China 8.8 6.0 6.5 6.7India 5.5 5.5 6.0 5.6

Latin America 5.0 3.5 4.5 4.9Russia 0.4 –1.0 0.0 3.2Eastern Europe 3.1 4.5 4.5 4.2

a Includes Singapore, South Korea, Chinese Taipei, Indonesia, Malaysia, the Philippines and Thailand.

Asia have fallen, this has been offset by increases to the United States andWestern Europe.

The short term outlook for Japan remains uncertain and depends on whatpolicy measures the Japanese government takes to boost domestic economicactivity and to restore confidence in its financial sector. In response to theeconomic slowdown, the Japanese government announced on 24 April adetailed stimulus package of ¥16.7 trillion, equivalent to around 3.0 per centof Japan’s GDP. This package includes temporary income tax cuts of ¥4.0trillion over the next two years and additional public spending of ¥7.7 trillion.This stimulus package, if fully implemented, is likely to increase growth byaround 1.5–2.0 percentage points in JFY 1998 (April–March).

However, economic commentators are divided on the effectiveness of thispackage. While some have increased their short term growth forecasts, theconsensus remains that this package may only be sufficient to prevent theJapanese economy from slipping further into recession.

A development which has important implications for the short term outlookfor Japan is the recent depreciation of the Japanese yen against majorinternational currencies. Against the yen, the US dollar appreciated to around¥140 in mid-June 1998 from ¥125 in December and ¥118 in September 1997.The deutschmark appreciated to around ¥79 in mid-June 1998 from ¥71 inDecember and ¥65 in September 1997. Given the subdued activity in theeconomy, the Japanese yen is expected to remain relatively weak in the shortterm. Consequently, Japan’s exports to the United States and western Europeare likely to remain strong.

The recent sharp depreciation of exchange rates in South Korea and majorSouth East Asian countries is expected to adversely affect Japan’s exports tothe Asian region. The above Asian countries (including Singapore) were thedestinations for around 37 per cent of total exports from Japan in 1997 (table 2).Japan will be affected in terms of the higher cost of Japanese sourced importsin these countries, and through the increased competitiveness of South Koreanand South East Asian exports against Japanese products in other markets.

Japanese banks have a large exposure in South Korea and South East Asiancountries. For example, in mid-1997, Japan accounted for around 23 per centof foreign bank lending in South Korea, 54 per cent in Thailand, 39 per centin Indonesia and 36 per cent in Malaysia. Japanese banks could be influencedby defaults in the above financially troubled Asian economies. This, in turn,could exacerbate the liquidity and bad debt problems faced by Japan’s financialsector.

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Developments in Japan’s financial sector could have important implicationsfor international financial markets and other major OECD countries. If theliquidity and bad debt problems faced by Japanese banks and companies arenot quickly resolved, it is likely that Japanese banks and companies will beforced to significantly increase the sales of, or even liquidate, foreigninvestment holdings and overseas assets, and repatriate funds to Japan. AsJapan is a significant investor in other major economies, especially in theUnited States, a significant liquidation of Japan’s overseas assets and anyrepatriation of Japanese capital on a large scale could place marked downwardpressures on the asset and equity prices in these countries as well as on theirexchange rates.

The commodity outlook presented in this information paper is based on theassumption that the Japanese economy will contract by 0.7 per cent in 1998.In 1999, a moderate recovery in private sector activity is expected. Growth isassumed to recover to around 1.0 per cent in 1999.

There are considerable risks surrounding this short term outlook for Japan.The predominant risk is that the current economic upheavals in South Koreaand South East Asia could have a more severe impact on Japan’s exportperformance and, hence, more significantly affect private consumptionexpenditure and business investment spending. The deeper and longer theupheavals last, the more severe the effect on Japanese growth prospects.Already the recent liquidity problem in the Japanese financial sector is havingan impact on small and medium Japanese companies through a ‘creditsqueeze’. Unless the Japanese government quickly addresses the financialsector problem, Japanese banks are likely to become increasingly cautious

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2 Trade between Japan and other major Asian countries (as a percentage oftotal merchandise exports)

Other major Asian Japan’s exports to other countries’ exports to Japan major Asian countries

(first half of 1997) (1997 as a whole)

% %

China 17.6 8.5South Korea 11.3 10.2Singapore 7.3 7.9Thailand 15.3 5.7Indonesia 27.4 4.0Malaysia 13.6 5.7Philippines 17.9 a 3.4

a In 1996.

about their lendings and the ‘credit squeeze’ will become more severe, placingsignificant downside risks on Japan’s economic prospects.

Over the medium term, the outlook for sustained growth in the Japaneseeconomy relies on the Japanese government’s ability to successfullyrestructure its financial sector and to proceed with the deregulation of itseconomy, especially the nontraded and services sectors. Nontraded andservices sectors in Japan are relatively heavily regulated and are subject to alow level of competition. Although reform proposals have been put forwardfor transportation, telecommunications and power generation, greater effortsare needed to enhance the efficiency of the nontraded and services sectors asthe Japanese economy continues to mature and the base of industrialproduction continues to be relocated to developing countries. Economicgrowth in Japan is assumed to average around 2.0 per cent a year over themedium term (2000–03).

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Japanese economic growth: implications forAustralia’s agricultural and resourcecommodities

While Japan is a major market for most of Australia’s main agricultural andresource commodities, there are substantial variations in Japan’s share ofexports for individual commodities. In recent years, the shares for agriculturalproducts have ranged from an average of around 10 per cent for wheat andwool to more than 50 per cent for beef. Japan has accounted for some 40 percent of Australian seafood exports and is the dominant destination for forestproducts. It is by far the largest single market for coal, taking around one-thirdof exports, and it accounts for around 40 per cent of iron ore exports. Sharesof these commodities and others in recent years, along with changes inAustralian exports to Japan over the nine months ended 31 March 1998 areshown in tables 3 and 4.

It should be emphasised that Australia is an exporter to global markets foragricultural and resource commodities. As such, developments in singlecountries, including Japan, need to be considered in the context of broaderinternational markets. Nevertheless, developments in Japan are of specialconcern to Australian commodity producers and exporters. Japan is the world’ssecond largest economy, and the world’s largest individual national com-modity importer — as such, the state of its demand significantly influencesworld import demand and prices. Second, it is the dominant Asian importer.Australia’s agricultural and raw material based exports are broadly comple-mentary with Japan’s large import demand for agricultural commodities andindustrial raw materials. This complementarity, along with factors of locationcontribute to Australia and Japan being substantial trading partners for manycommodities.

An overview of the impact of low and expected continuing low economicgrowth in Japan on Australian commodity exports and appraisals of theimplications for Australian agricultural, fisheries, forestry, mineral and energyexports are provided in the following sections.

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3 Principal Australian rural exports to Japan

All Share All Sharedesti- of desti- of

Japan nations Japan Japan nations Japan

$m $m % $m $m %

Wheat Cotton1994-95 259 1 632 15.9 1994-95 219 678 32.21995-96 323 3 389 9.5 1995-96 169 762 22.21996-97 298 4 346 6.8 1996-97 164 1 077 15.2July ’96–March ’97 216 3 171 6.8 July ’96–March ’97 88 565 15.6July ’97–March ’98 207 2 790 7.4 July ’97–March ’98 141 827 17.0

Wool Fruit and vegetable products a1994-95 542 4 216 12.9 1994-95 157 1 197 13.11995-96 323 3 664 8.8 1995-96 163 1 369 11.91996-97 330 3 744 8.8 1996-97 139 1 539 9.0July ’96–March ’97 245 2 812 8.7 July ’96–March ’97 114 1 137 10.1July ’97–March ’98 211 3 091 6.8 July ’97–March ’98 111 1 265 8.8

Beef and veal Other crops1994-95 577 2 846 55.4 1994-95 395 1 954 20.21995-96 368 2 384 57.4 1995-96 611 2 989 20.51996-97 049 2 065 50.8 1996-97 638 3 225 19.8July ’96–March ’97 753 1 457 51.7 July ’96–March ’97 462 2 500 18.5July ’97–March ’98 934 1 886 49.5 July ’97–March ’98 490 2 522 19.2

Dairy products Fisheries1994-95 253 1 440 17.5 1994-95 445 1 134 39.31995-96 336 1 692 19.8 1995-96 464 1 098 42.31996-97 318 1 781 17.9 1996-97 423 1 071 39.5July ’96–March ’97 228 1 324 17.3 July ’96–March ’97 295 751 39.4July ’97–March ’98 266 1 440 18.5 July ’97–March ’98 331 852 38.9

Other livestock products Forest products b1994-95 477 2 294 20.8 1994-95 562 853.7 65.81995-96 469 2 462 19.0 1995-96 567 873.4 64.91996-97 456 2 533 18.0 1996-97 542 875.7 61.9July ’96–March ’97 341 1 887 18.1 July ’96–March ’97 392 663 59.0July ’97–March ’98 279 2 145 13.0 July ’97–March ’98 477 778 61.3

Sugar Total rural exports to Japan1994-95 235 1 629 14.4 1994-95 5121 19 874 25.81995-96 234 1 552 15.1 1995-96 5026 22 234 22.61996-97 223 1 546 14.4 1996-97 4579 23 802 19.2July ’96–March ’97 197 1 364 14.4 July ’96–March ’973331 17 631 18.9July ’97–March ’98 230 1 466 15.7 July ’97–March ’983677 19 061 19.3

a Includes fresh dried and processed products, including wine. b Exclude carpentry and household items,particleboard and medium density fibreboard.

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4 Principal Australian minerals and energy exports to Japan

All Share All Sharedesti- of desti- of

Japan nations Japan Japan nations Japan

$m $m % $m $m %Energy MetalsPetroleum a Aluminium1994-95 1 837.0 3 790.4 48.5 1994-95 858.6 2 172.8 39.51995-96 1 881.6 4 164.6 45.2 1995-96 976.7 2 379.0 41.11996-97 2 165.3 5 152.5 42.0 1996-97 797.0 2 088.1 38.2July ’96– July ’96–March ’97 1 573.9 3 830.6 41.1 March ’97 555.9 1 520.8 36.6

July ’97– July ’97–March ’98 1 764.9 4 128.6 42.7 March ’98 1 043.9 2 107.9 49.5

Coal Copper1994-95 3 233.9 6 937.9 46.6 1994-95 60.0 420.2 14.31995-96 3 343.9 7 840.1 42.7 1995-96 54.0 441.8 12.21996-97 3 635.7 8 005.1 45.4 1996-97 3.0 351.6 0.9July ’96– July ’96–March ’97 2 715.2 5 929.0 45.8 March ’97 1.9 260.3 0.7

July ’97– July ’97–March ’98 3 174.6 7 069.9 44.9 March ’98 4.3 269.4 1.6

Metalliferous ores & other mineralsIron ore Gold1994-95 1 269.1 2 773.5 45.8 1994-95 1 318.2 4 905.2 26.91995-96 1 275.7 2 864.7 44.5 1995-96 894.5 5 690.2 15.71996-97 1 424.2 3 155.2 45.1 1996-97 257 4 832.8 5.3July ’96– July ’96–March ’97 1 047.0 2 290.2 45.7 March ’97 222.1 3 642.2 6.1

July ’97– July ’97–March ’98 1 223.1 2 777.6 44.0 March ’98 197.1 4 345.4 4.5

Copper ore Lead1994-95 256.5 377.1 68.0 1994-95 13.3 181.1 7.31995-96 278.0 486.1 57.2 1995-96 11.5 212.5 5.41996-97 351.6 655.5 53.6 1996-97 4.7 200.7 2.3July ’96– July ’96–March ’97 221.9 459.0 48.3 March ’97 3.8 156.3 2.4

July ’97– July ’97–March ’98 299.4 586.4 51.1 March ’98 2.1 132.1 1.6

Continued ➮

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4 Principal Australian minerals and energy exports to Japan continued

All Share All Sharedesti- of desti- of

Japan nations Japan Japan nations Japan

$m $m % $m $m %

Metalliferous ores & other minerals MetalsLead ore Steel1994-95 31.7 62.4 50.8 1994-95 90.1 1 378.6 6.51995-96 21.5 50.4 42.6 1995-96 94.5 1 510.3 6.31996-97 22.2 54.3 40.8 1996-97 48.7 1 384.3 3.5July ’96– July ’96–March ’97 16.1 41.2 39.1 March ’97 37.3 997.8 3.7

July ’97– July ’97–March ’98 16.0 60.3 26.6 March ’98 37.6 1 160.0 3.2

Zinc ore Zinc1994-95 161.8 403.7 40.1 1994-95 3.9 372.3 1.01995-96 180.4 433.6 41.6 1995-96 3.0 382.8 0.81996-97 154.5 490.9 31.5 1996-97 2.2 353.0 0.6July ’96– July ’96–March ’97 111.3 341.6 32.6 March ’97 1.9 257.3 0.7

July ’97– July ’97–March ’98 135.7 424.8 31.9 March ’98 2.3 305.7 0.8

Other ores and other minerals Other metals1994-95 172.3 4 034.1 4.3 1994-95 47.9 1 572.7 3.01995-96 159.2 4 850.1 3.3 1995-96 60.1 1 873.6 3.21996-97 151.4 4 598.1 3.3 1996-97 64.1 1 678.9 3.8July ’96– July ’96–March ’97 119.0 3 359.5 3.5 March ’97 48.5 1 294.4 3.7

July ’97– July ’97–March ’98 97.7 3 730.1 2.6 March ’98 48.2 1 339.8 3.6

Total minerals and energy exports to Japan$m $m %

1994-95 9 354.3 29 382.0 31.81995-96 9 234.6 33 179.7 27.81996-97 9 081.6 33 000.9 27.5July ’96–March ’97 6 675.9 24 380.2 27.4July ’97–March ’98 8 046.9 28 437.9 28.3

a Includes ABARE estimate of LNG exports to Japan.

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Overview: impacts on Australia’s commodityexports

Low and expected continuing low economic growth in Japan is likely to havean impact on Australia’s rural commodity exports. The most significant effectsare expected to be on exports of wool, seafood, forest products and possiblycotton. Effects on exports of wheat, sheepmeat and dairy products are notexpected to be significant in the short term.

The effects on exports of minerals and energy commodities to Japan willdepend largely on whether the commodities are for final consumption in Japanor whether they are for processing and re-export.

In cases where there is a reduction in shipments of minerals to Japan, producers(of metals in particular) may be able to sell affected products into the broaderworld market. This would especially be the case for the medium term asindustrial production in Japan is expected to continue to be relocated todeveloping countries. The extent of any associated price penalties will dependin large part on the degree to which lower consumption of metals and metalsintensive manufactures in Japan results in a decline in world prices.

It is likely that the adverse effects on commodity export earnings of reduceddemand from Japan will be partially offset by a lower value of the Australiandollar, especially against the US dollar. The Australian dollar was tradingaround US59c and TWI 56 in mid-June 1998, compared with US67c and TWI60 in late March 1998 and US75c and TWI 59 in October 1997. The Australiandollar is estimated to average around US68c in 1997-98. This is around 13 percent lower than its average of US78c in 1996-97. On a trade weighted basis,the Australian dollar is estimated to average TWI 58, compared with anaverage of TWI 59 in 1996-97.

For 1998-99 as a whole, the Australian dollar is assumed to average aroundUS64c. On a trade weighted basis, the Australian dollar is assumed to averageTWI 59. Over the medium term, the Australian dollar is assumed to graduallystrengthen against the US dollar and to average around US73c by 2002-03. Ona trade weighted basis, reflecting expected stronger Asian currencies, theAustralian dollar is assumed to depreciate gradually and average around TWI57 by 2002-03.

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Agricultural products

Wheat• Irrespective of changes in income growth and exchange rates, Japanese

demand for wheat has remained largely unchanged over the past eightyears. Similarly the proportion of wheat sourced by Japan from Australiahas remained relatively stable.

• Between 1989-90 and 1996-97, Japan imported, on average, 5.7 milliontonnes of wheat. Over this period Japan consistently sourced 20 per centof its wheat imports from Australia.

• Japan was Australia’s fourth largest export market in 1996-97, accountingfor 6.8 per cent of total Australian wheat exports. In the first 9 months of1997-98, Australia exported 7.4 per cent or 687 000 tonnes of wheat toJapan.

• Japan has been a closely regulated market for wheat with importscontrolled by the Food Agency of the Ministry of Agriculture, Fisheriesand Food. Slow economic growth in the short to medium term might beexpected to have little impact on import access. Japan undertook in theWTO Agreement on Agriculture that was concluded from the UruguayRound negotiations, to allow tariff quota access of 5.74 million tonnes ofwheat, meslin, triticale and their processed products a year.

Wool• Japan is Australia’s fourth largest export destination for wool in terms of

value and the seventh largest export destination in terms of volume. Aswell, Japan accounts for around 19 per cent of final world consumptionof woollen products. However, the nature of the wool market in Japan haschanged somewhat in the 1990s. A decline in domestic processing of rawwool, with relocation of processing capacity to lower cost Asiancountries, and an increase in imports of processed and semiprocesseditems are key aspects of these changes. As well, there has been a longterm trend toward substitution of wool by synthetic fibres.

• Consumer purchases of wool apparel in Japan declined in 1997, becauseof poor consumer confidence, unseasonably mild weather during winter

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and strong competition from fashionable and price competitive manmadefibres.

• In the first three quarters of 1997-98, Australia exported around 24 000tonnes of raw and semiprocessed wool to Japan, declining from 32 800tonnes for the same period in 1996-97. The value of Australia’s woolexports to Japan has declined from $245 million in the first three quartersof 1996-97 to $211 million for the same period in 1997-98.

• With slow retail demand, stocks of worsted yarns and wool tops arecurrently higher than average. As a result, Japan’s wool pipeline activityis expected to slow further in 1998-99 and demand for raw wool isexpected to fall.

• Should income growth remain low in the medium term, the trend towardlower final consumption of wool products is likely to continue, as wooldemand is responsive to income growth. In addition, the trend towardsynthetics and relocation of processing to lower cost countries is likely tocontinue, reducing Japanese direct imports of wool.

Cotton fibres• Japan processes very little of the world’s cotton — less than 2 per cent in

1996-97. This has been declining over time, with processing capacitymoving to lower cost countries in South East Asia.

• While Japan processes only a small part of the world’s cotton, it has beena significant market for Australian cotton.

• Japan’s share of Australian cotton exports declined from around 30 percent in the early 1990s to around 15 per cent in 1996-97. This decliningtrend is expected to continue over the short to medium term, as processingcapacity continues to move from Japan to lower cost countries.

• There is a general trend toward increasing consumption of cotton globallyalong with rising incomes in developing countries and gradually decliningreal prices. This trend is expected to continue in the medium term,although it may slow somewhat in the short term as a result of the Asiancurrency crisis. If Japanese income growth remains low, little growthmight be expected in Japanese final consumption of cotton.

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Beef• Japan is Australia’s largest export market for beef. In 1997 almost $1.3

billion worth of beef and veal was exported to Japan, up from $900 millionin 1990.

• Japan’s imports of beef rose rapidly in the first half of the 1990s afterJapan liberalised imports by replacing quantitative restrictions with tariffonly access. Australia shared in this growth, with Australian exportsrising from 177 000 tonnes in 1989 to 315 000 tonnes in 1995. In 1996and 1997 confidence of Japanese consumers in the product was shakenby health and safety concerns (E Coli and BSE or mad cow disease).Those concerns contributed to temporary static demand, but consumers’confidence in the product appears to be returning.

• Demand for beef in Japan is still relatively weak. A March surveyconducted by Japan’s Management and Coordination Agency showedbeef consumption was 4 per cent below that of March 1997. Little growthin Japanese beef consumption is expected in 1998-99.

• Falling domestic production in Japan, however, is expected to result inhigher demand for imported beef. Australian exporters will also benefitin 1998-99 from lower US production, and a weaker Australian dollarrelative to the US currency. As a result, Australian exports to Japan areforecast to increase by 3 per cent to 315 000 tonnes in 1998-99.

• Despite Japan’s economic slowdown, Japanese beef consumption in themedium term is expected to resume its slow growth. Lower Japanese beefproduction, combined with a reduction in beef import tariffs, is expectedto result in beef consumption being increasingly met by imports. With USexports to Japan expected to fall over the next 2–3 years, and with theAustralian dollar to stay at a low value against the US dollar, Australianbeef exports to Japan are forecast to increase approximately 12 per centby 2002-03.

Sheepmeat• Australian mutton exports to Japan increased by 34 per cent to 12 000

tonnes in the 10 months to April 1998 over the same period last year. Thisincrease in exports was due to a ban by Japan on pigmeat imports fromTaiwan due to an outbreak of foot and mouth disease. These two productscan be substituted for one another in the manufacturing industry.

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• As a result, mutton exports to Japan accounted for 9 per cent of totalAustralian mutton exports in the 10 months to April 1998, making Japanour third largest mutton destination.

• In contrast, Australian lamb exports to Japan fell by 17 per cent in the 10months to April 1998 over the same period last year. Japan is Australia’ssixth largest destination for lamb exports.

• Sheepmeat consumption in Japan is very small. The effect of low Japaneseeconomic growth, if it is to continue into the medium term, on Australiansheepmeat exports would be minimal. As lamb is a small item in Japanesediets, it may be possible to expand demand through promotion.

Dairy• Japan is itself a significant dairy producer, producing only marginally less

milk than Australia. However, 60 per cent of its milk production isconsumed as fluid milk. It is still a net importer of dairy products,producing only 15 per cent of its total cheese requirements and 75 percent of its skim milk powder requirements.

• In most other Asian markets, per person consumption remains low,reflecting dairy’s relatively small place in overall food consumption. Withthe highest per person consumption levels in Asia of 90 litres a year, Japanremains the dominant import market for dairy products in Asia, and islikely to continue in this position in the foreseeable future. Unlike mostof Asia (excluding India), the Japanese market has been consuming dairyproducts for quite a long time. Japanese dairy consumption was built upthrough the introduction of dairy products into government funded schoollunch programs after 1945, and the subsequent development of a domesticcheese market from the 1960s.

• Japan is the largest market for Australian dairy products, taking around47 per cent of total Australian cheese exports. Japan also importssignificant volumes of milk powders, with a heavy emphasis on skim milkpowder for stockfeed purposes, and specialty powder for formulations foruse by downstream food processing industries such as ice cream andconfectionery production. Japan took 10 per cent of Australia’s skim milkpowder exports in 1996-97.

• The slowdown of economic growth in Japan is not expected to signifi-cantly affect Australia’s cheese trade. Economic growth has been slow inJapan for a number of years, yet cheese consumption in Japan has grown

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by around 5 per cent a year throughout the 1990s. Australia has taken anincreasingly larger share of Japanese imports. Recently there has been asurge in the popularity of Italian food in Japan, favoring the increasedconsumption of cheese. In the nine months to March 1998, cheese exportsto Japan increased by 17 per cent compared with the same period in 1996-97.

• However, Australian exports of skim milk powder to Japan in the ninemonths to March 1998 fell by 4 per cent compared with the same perioda year ago, whereas total skim milk powder exports fell by 10 per cent.Exports of butter to Japan declined by 1 per cent over the same period.

• Under the Uruguay Round outcome, Japan is committed to providinglimited market access for milk powders and butter. However, the demandfor dairy inputs by Japan’s industrial and food processing sector isexpected to exceed the Uruguay Round commitments over time, leadingto the possibility of additional import opportunities. Should incomegrowth remain low in the medium term, these additional importopportunities may emerge more slowly.

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Forest products

Australian woodchip exports to Japan• Japan takes over two-thirds of Australian exports of forest products, by

value. However, the bulk of this is woodchips. Japan currently takes 99per cent of Australian woodchip exports.

• These woodchip exports represent around half the value of Australianforest product exports. Australian woodchip exports in 1996-97 werevalued at $518 million (table 5). Total forest products exports were valuedat around $1104 million in 1996-97.

• Japan is the world’s largest woodchip importer, taking 26.5 milliontonnes, or nearly 70 per cent, of recorded world woodchip imports in1995.

• Australia exported 8.4 million tonnes of woodchips, nearly one-quarterof recorded world woodchip exports in 1995.

Implications of continuing low growth in Japan• As shown in table 6, Australian exports of sawnwood and paper and

paperboard to Japan declined in the first three quarters of 1997-98compared with the same period a year earlier. This is directly attributableto the economic slowdown in Japan.

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5 Australian woodchip exports

Unit 1996-97 1997-98

Sep q. Dec q. Mar q. Jun q. Sep q. Dec q. Mar q.

Volume * kt 758.5 909.9 744.7 910.1 1062.7 1137.6 1021.9

Value $m 118.8 142.0 117.8 139.8 154.3 167.5 153.9

Unit value– hardwood A$/bdt 162 162 164 161 149 151 152– softwood A$/bdt 142 140 131 137 131 135 148

* Bone dry basis.

• Exports of woodchips increased in the first nine months of 1997-98. Thisis because a backlog of woodchips which built up in 1996-97 is now beingexported. Once the backlog is gone, the level of woodchip exports couldbe expected to fall.

• A recent ABARE study on the export of Australian woodchips to Japansuggested that the prices received for Australian woodchips areparticularly sensitive to the level of economic activity in Japan. Japan isunique in being the only one of the large paper making regions (the othersare North America and Scandinavia) which does not have large domesticsources of pulpwood and so needs to secure a large proportion of its woodfibre on the world market.

• The only current alternative markets for Australian pulpwood are SouthKorea and Chinese Taipei. However, these countries import most of theirpulp wood as whole logs, and have recently cut imports.

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6 Main Australian forest products exports to Japan

Unit 1996-97 1997-98(July–March) (July–March)

VolumeWoodchips * kt 2 390.0 3 171.0Sawnwood ’000 m3 12.3 6.8Paper and paperboard kt 7.5 3.7

ValueWoodchips $m 374.5 468.6Sawnwood $m 13.4 6.4Paper and paperboard $m 3.6 1.8

* Bone dry basis.

Fisheries products

• The value of Australian seafood exports was $1.07 billion in 1996-97,with sales to Asia constituting over 90 per cent. The principal markets areJapan (39.5 per cent), Hong Kong (21.1 per cent) and Chinese Taipei (20.1per cent). The main products are rock lobster (42 per cent), prawns (17.2per cent), abalone (15.8 per cent) and tuna (5.1 per cent). All are targetedto the luxury end of seafood markets.

• The value of seafood exports is estimated to fall by around 10 per cent in1997-98 to around $1.18 billion with lower sales of rock lobster, abaloneand prawns. This is due mainly to a decline of exports to Japan, as a resultof low economic growth and weak consumer confidence, and a slowdownin business activity and tourism in Hong Kong. Tourism to Hong Kongin 1997-98 is around 30 per cent lower than in 1996-97. An increase intariffs paid on rock lobster imports by Chinese Taipei is also likely to havean impact on Australian sales.

• The economic slowdown in Japan appears to have had an impact onAustralian seafood exports in early 1998, with exports to Japan falling by36 per cent in February and 32 per cent in March on comparable monthlysales in 1997. However, it is uncertain whether this was a short termphenomenon. In the nine months to March 1998, exports to Japan werestill 22 per cent higher than a year ago, due mainly to higher sales ofprawns and tuna.

• The impact of the Asian economic downturn on total Australian seafoodexports will depend on developments in other markets. For example, thevalue of total Australian seafood exports increased by 13 per cent overthe nine months to March 1998 compared with a year earlier. While salesto Chinese Taipei fell, this was more than offset by increases to China andthe United States.

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Minerals

Iron ore and steel• World steel output is forecast to remain relatively unchanged in 1998 at

around 796 million tonnes before increasing by 2 per cent to 811 milliontonnes in 1999.

• Steel consumption has fallen in the Asian region since the economicupheavals began in mid-1997. However, continued strong demand in theUnited States and western Europe, and the establishment of new marketsin Latin America and Africa have supported steel production in mostregions. Consequently, the outlook for steel production in most regionsremains positive, with Japan being the most significant exception.

• Japanese crude steel production is forecast to decline in 1998 as a resultof weaker demand for steel in the domestic market. Domestic con-sumption of steel is expected to decline as a result of lower demand forsteel intensive manufactured items in both domestic and export markets.A decrease in government and private sector spending has led to reduceddemand in the construction and vehicle production sectors in particular.Demand for Japanese exports of steel intensive manufactured items is alsoexpected to fall in the Asian region in 1998.

• Japanese steel production is forecast to fall by 7 per cent to 97.5 milliontonnes in 1998. Steel production is forecast to recover to 101 milliontonnes in 1999 as demand improves in domestic and export markets. Asblast furnaces are expected to account for a significant proportion of theoverall reduction in Japanese steel output in 1998, iron ore imports areforecast to fall by around 5 million tonnes to 122 million tonnes.

• The volume of Australian iron ore exports to Japan increased by 3 percent to 47 million tonnes in the nine months to March 1998. The value ofthese exports increased more significantly — by 17 per cent to over $1.2billion — as a result of the depreciation of the Australian dollar againstthe US dollar denominated iron ore prices. These prices are negotiatedannually for each Japanese fiscal year (April–March), and are expectedto come under pressure at the next round of negotiations in late 1998.

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• Australian iron ore exports to Japan are expected to fall throughout 1998in line with reduced output from Japanese blast furnaces. Australian ironore exports to most other markets are expected to increase in theremainder of the year, as the procurement of raw materials stabilises andblast furnace steel production increases.

• Total Australian iron ore exports are estimated to rise by over 3 per centto 142 million tonnes in 1997-98, valued at $3.8 billion, before rising to145.5 million tonnes, valued at $4.2 billion, in 1998-99.

• In summary, the downturn in Japanese demand for steel is slowingexpansion of Australian iron ore exports in total rather than reducing it.If Japanese economic growth were to remain sluggish in the medium term,it would continue to restrain growth in Australian iron ore exports andresult in lower prices than would otherwise be expected.

Aluminium• Japanese consumption of aluminium has been expanding gradually

during the 1990s despite slow economic growth since 1991.

• Two of the main end use sectors for aluminium in Japan, the constructionand automotive industries, have been weak for some time. Housing startsfell by 12 per cent in the year to March 1998. Motor vehicle productionhas been falling since the second quarter of 1997.

• Due to this weak demand in Japan, and the existence of long term importcontracts, aluminium stocks held in Japanese ports grew by over 100 000tonnes or about 20 per cent in the first four months of 1998.

• Domestic aluminium consumption in Japan is forecast to fall by 3.3 percent in 1998. This follows an increase of 2.0 per cent in 1997.

• Despite weak aluminium demand in Japan, Australian exports ofaluminium to that country, both in value and volume, have increased. Inthe nine months to March 1998, the value of Australian aluminiumexports to Japan almost doubled compared with the corresponding perioda year earlier. For that nine months, Japan’s share of Australia’s exportswas 49.5 per cent compared with 36.6 per cent in the nine months to March1997. The recent depreciation of the Australian dollar against currenciesof other suppliers, mainly in North America, may have contributed tohigher Australian exports to Japan.

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• Australian total exports of aluminium are estimated to have increased by34 per cent to $2.8 billion in 1997-98, but are forecast to ease to around$2.7 billion in 1998-99. Higher export volumes, reflecting increasedproduction from both new and restarted capacity, and a lower Australiandollar are expected to be more than offset by the effects of weakeraluminium prices.

• In the medium term, the outlook for Japanese purchases of Australianaluminium will depend on the extent of any return to growth in othermarkets, particularly in Asia. Total Japanese imports of aluminium areexpected to rise relatively slowly.

• With only minor capacity expansions likely over the medium term,Australian export earnings from aluminium are projected to remainaround $2.8 billion a year, in real terms. Japan is likely to maintain itsposition as Australia’s largest export market for aluminium over themedium term.

Copper• Japan is the world’s second largest consumer of copper after the United

States. In 1997, Japan accounted for 11 per cent of world consumption.Over 60 per cent of Japanese consumption is in the electrical andelectronic and building and construction sectors.

• Consumption of copper in Japan is forecast to fall in 1998 because of lowdomestic construction activity, and weak domestic and export demand forconsumer goods containing copper (such as motor vehicles and consumerelectronics) and semifabricated copper products, the main markets forwhich are South East Asian countries. Intermediate copper consumingindustries in Japan, such as wire, rod, tube and brass makers, reportedlower output for the first few months of this year. The Japan Brass MakersAssociation has forecast that brass demand will fall by 5 per cent in the1998 fiscal year.

• Despite expected lower domestic consumption in 1998, Japanese copperrefineries have maintained output, largely because they have been able tofind alternative markets for surplus metal in Europe and the United States,where copper consumption remains high. Given a continuation of strongexport demand for metal from countries outside Asia, copper productionin Japan is expected to be maintained in the remainder of 1998.

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• With the economic stimulus package targeting a range of publicinfrastructure projects, including telecommunications and construction,Japanese copper consumption could pick up toward the end of 1998 andmay be expected to rise marginally in 1999 in line with assumed modestincreases in industrial production and economic growth.

• Japan is a significant market for Australian exports of copper con-centrates. In recent years, over 50 per cent of Australia’s concentratesexports have gone to Japan. However, with the expected commissioningof the redeveloped Port Kembla copper smelter in 1999 (owned by aJapanese consortium), Australia’s concentrate exports to Japan areexpected to fall in favor of an increase in exports of refined metal.

• Over the medium term, Japanese copper production and consumption isprojected to continue to grow, in line with assumed modest increases inindustrial production and economic growth.

Lead• Consistent with other developed countries, around 70 per cent of Japan’s

lead consumption is used in the production of batteries, predominantlyfor use in motor vehicles.

• Japanese lead consumption is forecast to fall in 1998, primarily becauseof an expected decline in new motor vehicle production and sales. TheJapan Automobile Manufacturers Association expects a substantial fallin domestic vehicle sales in 1998 mainly because of negative consumersentiment.

• Demand for Japanese vehicles in other Asian countries has also fallensharply since late 1997, and is not expected to recover until strongeconomic growth returns to the region. In contrast, exports to NorthAmerica and Europe have been buoyant.

• Based on a March 1998 survey of Japanese planned smelter production,Japanese refined lead production in 1998 is forecast to be 298 000 tonnes,virtually unchanged from 1997. However, if this forecast is realised, lowerconsumption is likely to result in a buildup of lead stocks toward the endof 1998.

• In 1999, Japanese lead consumption is forecast to increase slightly asdomestic consumption of motor vehicles and industrial production rise

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under the stimulus of the economic package. Given an expected buildupof stocks in 1998, refined lead production is forecast to fall in 1999.

• Australian exports of lead to Japan are predominantly in the form ofconcentrates. In recent years Australia has supplied, on average, around40 per cent of Japan’s concentrates requirements. In the nine months toMarch 1998, the volume of lead concentrate exports to Japan increasedby 16 per cent. However, Australian exports may decline in 1998-99 ifJapanese smelter production falls in 1999, as expected.

• Over the medium term, Japanese lead consumption is projected tocontinue to grow slowly, in line with assumed low economic growth.Refined lead production, after recovering in 2000 in response toincreasing demand, is projected to increase slowly over the period to2003.

Zinc• Around half of Japanese zinc consumption is in the production of

galvanised steel, for use principally in construction and in the manufactur-ing sector, particularly the motor vehicle industry. Other main usesinclude brass manufacture and die casting.

• Japanese zinc consumption is forecast to fall in 1998, mainly because ofweak and declining domestic construction activity, together with anexpected fall in motor vehicle output. With several ASEAN countriesexperiencing economic downturn, and around 16 per cent of Japan’s totalexports going to those countries, a decline in export demand for Japanesemanufactured goods containing zinc, such as galvanised constructionmaterials, is expected.

• Japan’s economic stimulus package includes tax cuts and substantialspending on public works, such as improvements to distribution systems,urban renewal and regional public works. The tax cuts may encouragespending on consumer goods such as motor vehicles, while increasedpublic works spending is likely to encourage increased production ofgalvanised construction steel — leading to higher zinc consumption. Withthe stimulus package expected to be implemented later this year, zincconsumption is expected to rise in 1999.

• Based on a March 1998 survey of Japanese planned smelter production,Japanese refined zinc production in 1998 is forecast to rise by 2.7 per cent,implying a stock buildup by the end of the year, given expected lower

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consumption. According to the survey, producer stocks of zinc at the endof March were around 27 per cent higher than at the same time last year.If the stocks increase in 1998 is large, refined zinc production may fall in1999, despite expected increased consumption.

• Australian exports of zinc to Japan are predominantly in the form ofconcentrates. In recent years Australia has supplied, on average, over 50per cent of Japan’s concentrates requirements. In the nine months toMarch 1998, the volume of zinc concentrates exports to Japan fell by 8.3per cent. A further decline may occur in 1998-99, if Japanese smelterproduction falls in 1999.

• Japanese zinc consumption is projected to continue to grow slowly overthe medium term, in line with assumed low economic growth.

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Energy

Coal

Thermal coal• Thermal coal exports to Japan are expected to increase steadily over 1998-

99 as two 1000 megawatt power stations are brought on stream. Even ifthe capacity of these power stations is not fully utilised due to lowereconomic growth, thermal coal imports are still expected to increaseslightly. In the following years, a number of other power stations areexpected to start up allowing for a slow but steady increase in Japaneseconsumption of thermal coal.

• Australia’s share of Japanese imports of thermal coal increased in 1997,due mainly to the low spot prices offered by Australian producers in lightof excess supplies. However, deregulation in Japan’s domestic electricitymarket has led to a corresponding shift in policy by the Japaneseelectricity utilities toward a greater percentage of purchases on the spotmarket. Thermal coal exports to Japan in the March quarter 1998increased from the previous quarter.

• Thermal coal prices are expected to continue to decline as excess suppliespersist.

• In the medium term, demand for thermal coal in Japan is projected toincrease slowly. Australia’s market share might decline marginally withincreased competition from Asian countries such as Indonesia and China.

Metallurgical coal• Metallurgical coal requirements are expected to decline in Japan in 1998,

due to lower expected blast furnace steel production. However, Australiancoal exports are expected to remain largely the same over this period,reflecting the outcome of contract negotiations for JFY 1998. Althoughsuch contracts do allow for variations in tonnage, Australian exports areexpected to be maintained largely at the expense of US exports.

• After falling by between 5 and 10 per cent in JFY 1998, contract pricesfor metallurgical coal are expected to fall further in JFY 1999, due to weak

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demand and excess supplies. This will lower the unit value of Australianexports.

• In the medium term, little or no growth is expected in Australian exportsto Japan, as total blast furnace capacity in Japan is not expected toincrease. Nevertheless, total Australian exports are expected to expandgradually with growth in other markets, such as India and Chinese Taipei.

Oil and gas• The volume of Australia’s crude oil and condensate exports to Japan in

the six months to March 1998 were largely unchanged from the sameperiod a year ago, despite Japanese consumption falling by 3 per cent.

• Australian producers of LNG received an estimated average price of $235a tonne from Japanese buyers in the March quarter 1998, the highestaverage quarterly price in real terms since 1993. However, falling oilprices in early 1998 indicate that high LNG prices will not be sustainable.The unit price of LNG is estimated to fall below $195 a tonne in the Junequarter and to average $211 a tonne in 1997-98.

• In 1998-99, the value of LNG exports to Japan is estimated to remainaround the 1997-98 level of $1.6 billion, as the effect of lower oil pricesin the first half of 1998 feed through to the LNG price. Australia’s LNGproduction is consistently operating at full capacity, with more than 7.6million tonnes of LNG exported in 1997-98.

• Japanese consumption of LNG and crude oil is expected to be adverselyaffected by low economic growth. Deregulation in the power generationsector, significant variation in hydro usage and disaggregation in thecurrent group of Japanese buyers (who operate as a single unit) is likelyto increase the complexity of LNG trade. There is likely to be a changein Australia’s future contractual relationship with Japan, including moreflexible terms with respect to quantity and price, and short term trading.In the short term, this is likely to stall development plans in Australiawhile producers vie for secure contracts.

• In the medium term, the prospects for exports of LNG from Australiaremains uncertain, both in aggregate and in sales to Japan. The size ofinvestments in Australia will be determined largely by the ability to securelong term contracts and to compete with other suppliers, some of whomhave been prepared to sell significant quantities on the spot market.Demand for LNG, which has some environmental advantages over otherfossil fuels, is likely to increase in Japan.

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