westpac regional economic reportvolume four 2011 trends report overview the final quarter of 2011 is...

Trends.Westpac RegionalEconomic Report

Agribusiness

Westpac Institutional Bank is a division of Westpac Banking Corporation ABN 33 007 457 141. Information current as at date above. This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs. Westpac's financial services guide can be obtained by calling 132 032, visiting www.westpac.com.au or visiting any Westpac Branch. The information may contain material provided directly by third parties, and while such material is published with permission, Westpac accepts no responsibility for the accuracy or completeness of any such material. Except where contrary to law, Westpac intends by this notice to exclude liability for the information. The information is subject to change without notice and Westpac is under no obligation to update the information or correct any inaccuracy which may become apparent at a later date. Westpac Banking Corporation is registered in England as a branch (branch number BR000106) and is authorised and regulated by The Financial Services Authority. Westpac Europe Limited is a company registered in England (number 05660023) and is authorised and regulated by The Financial Services Authority. If you wish to be removed from our e-mail, fax or mailing list please send an e-mail to [email protected] or fax us on +61 2 8254 6934 or write to Westpac Economics at Level 2, 275 Kent Street, Sydney NSW 2000. Please state your full name, telephone/fax number and company details on all correspondence. © 2011 Westpac Banking Corporation. Past performance is not a reliable indicator of future performance. The forecasts given in this document are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from these forecasts.

Contents

The Westpac Regional Economic Report is a quarterly publication

Editor:Neil BurgessSenior Commodities Analyst, AgribusinessCommercial & AgribusinessLevel 28, 275 Kent Street, Sydney, NSW 2000Telephone: (61 2) 8253 7912email: [email protected]

Aimee BrayGraduate – AgribusinessRegional Commercial & AgribusinessLevel 29, 275 Kent Street, Sydney, NSW 2000Telephone: (61 2) 8253 3415email: [email protected]

Overview 3

Macro overviewLivestock 4The Australian economy 6Australian interest rates 8Australian dollar 10

Commodity outlooksBeef and dairy 12Grains and oilseeds 14Sugar and cotton 16Sheep and wool 18

Summary forecast tablesFinancial forecasts – Australia 20Economic forecasts – Australia 21Forecasts – commodity prices 22Summary of world output 23

Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.

3

Chart 1. Chart 2.

Volume Four 2011 Trends Report

Overview

The final quarter of 2011 is well and truly progressing. The climatic conditions have turned out to be very favourable, providing an excellent growing season and delivering rain when it was needed. The Australian winter crop has developed well, despite experiencing some nervous times earlier in the season and it now appears to be on track to deliver a bumper harvest to the cropping community (fingers crossed). The harvest has already commenced in Western Australia, and after the disappointment of the previous year, 2011 looks likely to deliver significant improvements in terms of both quality and yields. The East Coast croppers are not too far behind with some headers already rolling in northern regions. As the season draws to a conclusion, eyes are turning skyward to ensure a repeat of 2010 and the damaging rain does not occur again.

In the international grains markets, the story remains mixed. For wheat, the large 2010 harvest from Australia, together with improvements in yields from other global producers has resulted in a much stronger global balance sheet for wheat supply. Strong export activity has been seen, particularly from the Russian and Black Sea regions where wheat has been offered at significantly discounted rates against other exportable wheat. The volatility in the corn market which was evident through the third quarter of the year on the back of poor production data has tended to ease. While the corn balance sheet has weakened, there are sufficient alternative sources for corn consumers and prices have meandered along within a fairly narrow range.

Outside of the agricultural environment, the global economic maelstrom remains stubbornly in place and the resulting nervousness from investors is being felt across currency, equities and of course the commodity markets. The technical elements of the market remain the dominant force over the fundamentals and as a result extreme volatility remains. While the Euro debt crisis remains unresolved, the commodity markets remain at the mercy of fickle investor activity.

All things being equal, the final quarter of 2011 should end what has been a relatively successful year for agriculture in Australia. Despite the difficulties of the beginning of the year, the industry as a whole has shown considerable resilience and has been supported by strong commodity prices against the backdrop of an Australian dollar that has been persistently above parity against the US dollar. Indeed, farm returns are expected to be significantly improved, according to the Assistant Governor of the Reserve Bank of Australia, “Farm income for 2011 will be double the average over the last 20 years”.

In this quarter’s edition, the special feature article is on the livestock industries.

Over the 2011 year, prices in the livestock markets have displayed something of a renaissance. Despite the volatility in outside markets, the Australian market has maintained discipline and performed reasonably strongly. Certainly there has been volatility with prices as supply and demand have fluctuated at the sale yards, but overall, the industry is still performing well above expectation.

In the international markets, the traditional destinations for Australian beef remain subdued, however, the industry has maintained course with the further development of non-traditional export markets and these are now breathing new life into export opportunities.

3

4

5

6

7

8

Dec-85 Dec-89 Dec-93 Dec-97 Dec-01 Dec-05 Dec-09

Farm GDP

Sources: ABS, Westpac Economics

$bn/Qtr

Farm output

0

50

100

150

200

250

300

Feb-85 Feb-89 Feb-93 Feb-97 Feb-01 Feb-05 Feb-09

USD Index AUD Index

Sources: MLA, Bloomberg, Westpac Economics

Index

Westpac Commodity Index Price

4


Livestock

Beef, sheep & lamb: The path from paddock to plate is changing.The Sunday roast and summer BBQ of steak or chops are as Australian as meat pies and Holden cars. The consumer has always had a readily accessible supply of meat for consumption, but the way the produce gets from the paddock to the consumer’s plate has been changing and not just in the domestic market.

While the Australian domestic market is the largest single market for meat producers, a lucrative export market has been developed over the years based on the supply of a safe, quality product. The vast majority of meat exports from Australia are in the categories of chilled and frozen, however, a proportion of exports are on a live basis. The live export ban implemented earlier this year placed this section of the industry squarely in the spotlight, as further calls were made for the processing of animals to be conducted in Australia as opposed to sending them offshore on a live basis. For live shipments, average returns on a per kg basis have been slow to gather momentum. According to ABS statistics, over a 23 year period, live cattle exports have shown a 39% increase in AUD/kg returns and for live sheep exports an 80% increase in AUD/kg returns has been seen over the same period. However, this 80% increase has been significantly magnified due to the rapid increase in price seen over the past 12 months due to supply tightness and increased consumer demand.

In the live export market there are obvious cultural and religious requirements of overseas buyers and consumers that have to be considered. However, there are external forces at work that will add an interesting dynamic to the face of live exports particularly to SE Asia in the future.

As consumers experience improvements to their economic and financial status, their dietary choices change accordingly. As a result of their improved financial environment, there is almost a symbiotic relationship between wealth improvement and the rise and proliferation of the supermarket/hypermarket chains. As global supermarket companies look for the next untapped market, SE Asia and China are providing ideal opportunities for profitable expansion and in turn providing additional outlets for Australian producers. Retail food sales in Asia are expected to almost double, from US$2.7 trillion in 2010 to a staggering US$4.6 trillion in 2014 as consumers progress up the food value chain. To further underpin this rapid growth, an increased consumer sensitivity to food safety has resulted in significant shifts in food procurement away from traditional wet markets to supermarkets.

As the Asian region has experienced strong economic growth, there has been huge investment in the development of infrastructure in particular road networks which in turn have seen the introduction of improved transportation and cool store logistics. This in turn has increased the number of supermarket outlets that are requiring continuous and sustainable supplies of quality produce. With Australia’s proximity to these markets and short shipping times, meat producers are ideally positioned to take advantage of the long term opportunities through the supply of chilled and boxed products that will match with consumer requirements.

As mentioned previously, the domestic market is the single largest market for Australian red meat and not surprisingly, the rise and proliferation of the supermarket chains are attempting to capture a greater slice of the consumers ‘red meat dollar’. Numerous promotions are in operation to attract consumers, the latest being the significant reduction in the price of lamb.

Supermarkets are the primary retail channel for lamb, with their share of the market estimated to be around 65%, up from 61% a year earlier. Woolworths was the largest seller, accounting for over 30% of total lamb sold at retail, followed by Coles with 22%. This compares to a beef market share of around 28.9% for Woolworths and 21.6% for Coles, (according to the latest Roy Morgan data). For beef, the largest primary retail channel is still the independent butchers at 29.4%.

As the supermarkets endeavour to gain a greater proportion of the red meat retailing market, there is the concern that their purchasing power may spill over into the procurement markets and drive down the sale yard prices. However, while the domestic market is the largest single market, the combined export markets are considerably larger in both volume and value terms. Despite some of the traditional export markets remaining sluggish, emerging markets are constantly being developed and expanded. When combined with the domestic re-stocker and

Supply chains are changing.

Live export returns slow to grow.

Dynamics are changing.

Supermarket chains look to expand.

Infrastructure developments boost access.

Chasing the consumers dollar.

Supermaket channels hold sway.

Strong competition for supplies.


5

Chart 3. Chart 4.


Chart 1. Chart 2.

Livestock

processor activities, considerable competition exists at the saleyards. This has resulted in sale yard prices remaining relatively robust, while supermarket prices have started to experience rigorous discounting.

Ultimately, the strategic goal is to encourage consumers to increase their meat consumption through improved access, varied delivery channels and price. While this will always remain a challenge, for those who understand and embrace the challenge, there are interesting times ahead.

Evolution is necessary.

Live cattle exports – pressure from export ban

0

100

200

300

400

500

600

700

800

0

200

400

600

800

1000

1200

1990 1992 1996 1999 2002 2005 2008 2011(f)

Head (lhs)Value (rhs)

Source: Livecorp, Westpac Economics

‘000’ Head AUD Million

Live sheep exports

$-

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

3035404550556065707580

Mar-88 Mar-91 Mar-94 Mar-97 Mar-00 Mar-03 Mar-06 Mar-09

Average Weight per Head (lhs)

Average Value / Kg (rhs)

Source: ABS No 7215 Sep 2011

KG/Head AUD/KG

(f)

Source: Livecorp

Live sheep exports – value remains

0

1

2

3

4

5

6

7

8

0

50

100

150

200

250

300

350

400

450

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Number of head (rhs)AUD value (lhs)

AUD Millions Million head

Source: Livecorp

Live cattle exports

$1.00

$1.20

$1.40

$1.60

$1.80

$2.00

$2.20

$2.40

$2.60

150

200

250

300

350

400

450

Mar-88 Mar-91 Mar-94 Mar-97 Mar-00 Mar-03 Mar-06 Mar-09

Average Weight per Head (lhs)Average Value per Kilogram (rhs)

KG/Head AUD/KG

Source: ABS No 7215 Sep 2011

6


The Australian economy

The Australian economy is expanding but growth is likely to be below trend this year and into 2012. We are forecasting GDP growth to average 1.2% for 2011 and 2.8% for 2012. We expect the Reserve Bank to respond to these conditions and lower interest rates by 100bps over the year ahead, with the first instalment delivered in November. The lower rate environment will result in a strengthening of general conditions. Our forecast is for growth to approach 4% annualised over the second half of next year, up from 2½% for the six months to March 2012.

Conditions have rebounded from the severe weather disruptions of early this year. GDP advanced by 1.2% in the June quarter, in line with our forecast of 1.1%, rebounding from a sizeable contraction in the March quarter, revised to –0.9% from –1.2%. However, the mix of Q2 activity was disappointing. Domestic demand growth slowed, to 0.7% from 1.4%. Net exports remained a drag on growth, as exports were slow to recover. A one–off inventory build–up, in part because of the mining sector returning to more normal conditions, was the saviour in Q2, adding 0.8ppts to growth. But, an inevitable slowing in the rate of inventory accumulation will see inventories make a sizeable subtraction from growth in the near-term.

Our analysis indicates that the economy is entering a mid–cycle slowdown. Domestic demand growth, which was just a little below par at 3.4% in the year to June quarter 2011, is forecast to slow to 2.3% over the year to June 2012. There are a number of headwinds: interest rates, the high Australian dollar, stretched housing affordability, household debt and fiscal consolidation. This is against the backdrop of deteriorating international conditions. Together, these factors suggest the consumer, housing and public investment will restrain growth.

One major surprise in the national accounts update, which challenges our view, was a stronger starting point for consumer spending. Consumption increased by 1.0% in the June quarter, to be up 3.2% over the year. On the face of it, this is inconsistent with a “cautious consumer”. Although, it was also notable that the household savings rate remained elevated, at 10.5%, up from 8.7% a year–ago. The national accounts result – which suggested that retail sales increased by 1.4% – is at odds with the retail sales survey, which reported a rise of just 0.3% and is inconsistent with anecdotes and earning results of retailers for the period.

Much has happened since the April to June period. There has been a loss of confidence amongst consumers and business and the labour market has taken a turn for the worse. Private business surveys report that business conditions have softened to below trend. The Westpac–ACCI Actual Composite Index was firmly in the contractionary zone for a second consecutive quarter, falling by 1.2 points from 48.9 in June to 47.7 in September.

We expect GDP growth to be relatively weak in the September quarter, forecasting a rise of just 0.2%qtr. Domestic demand growth is expected to be sub-par, as it was in the June quarter, inventories are likely to make a sizeable subtraction and while net exports are forecast to be a small positive, the addition will be constrained by import strength (boosted by the higher dollar) and constrained by a gradual recovery of coal exports from the floods of early this year.

Consumer Sentiment declined to average 94 over the four months to October, down from an average 103.5 for the June quarter. Employment contracted in July and August to advance by just 5k during the September quarter and the unemployment rate increased to 5.2%, up from 4.9% in April. This will weigh on household income growth and reinforce consumer concerns about their job security. In this environment consumer spending is set to revert to the sub–par pace that has been evident for much of the time since the global downturn. We are forecasting consumer spending growth to slow to 2% for the year to June 2012.

We agree that overall business investment is set to be a growth pulse for the economy over the year ahead, driven by the mining sector in response to a record high terms of trade. However, the strength of this growth pulse is a matter of debate. Consistent with our less optimistic views on the international backdrop and on the Australian consumer our analysis suggests the investment outlook is not as buoyant as indicated by the general consensus. We see two broad risks. First, the risk that bottlenecks will constrain the speed of the mining investment upswing. Second, the risk that investment expenditure in the broader economy disappoints against the backdrop of deteriorating global and domestic trends. For a more detailed discussion of investment prospects see the September edition of this report.

Andrew Hanlan, Senior Economist

The RBA has cut ...

... in response to subdued conditions ...

... that were due in part ...

... to restrictive financial conditions.

We expect soft GDP in Q3 ...

... labour market weakness ...

... an anxious consumer ...

... & ongoing strength in mining capex.


7

Chart 1. Chart 2.

Chart 3. Chart 4.

Chart 5. Chart 6.


The Australian economy

Australia: economic outlook

-3

0

3

6

9

-3

0

3

6

9

Jun-87 Jun-91 Jun-95 Jun-99 Jun-03 Jun-07 Jun-11

% ann% ann

Domestic demand (lhs) Demand, forecast (lhs)GDP GDP, forecast (rhs) forecasts

toend '12


Australia: the domestic growth mix

-2

0

2

4

-2

0

2

4

consumer housing business public demand

ppts cont'

2009 2010 2011f 2012f

ppts cont'


contributions to year end domestic demand growth

Household savings rate climbs

0

3

6

9

12

15

-6

-3

0

3

6

9

12

15


% income% income

Sources: ABS, Factset, Westpac Economics

Australia: household demand to soften

-3

0

3

6

9

-3

0

3

6

9


% ann% annHousehold demand H'hld D, forecast (lhs)GDP GDP, forecast (rhs)


Jobs market cools, unemployment rises

-4

-3

-2

-1

0

1

2

3

23456789

101112

Aug-89 Aug-94 Aug-99 Aug-04 Aug-09

Unemployment rate (lhs)

Full Time employment * (rhs)

Sources: ABS, Westpac Economics% chg, 6mth%

* smoothed

Mining investment boom

0

2

4

6

8

10

50

70

90

110

130

Jun-86 Jun-92 Jun-98 Jun-04 Jun-10

index $bn /qtr

Terms of trade (lhs) Infrastructure ** (rhs)


** Commencements for resource projects(2 qtr avg) excluding Pluto & Gorgon

private

8


Australian interest rates

As we predicted the Reserve Bank Board decided to lower the cash rate by 25bps to 4.5% following its November Board meeting. This was the sixth consecutive November that the Bank had adjusted rates and just emphasises the importance of an update on the path of inflation (received on October 26) and the opportunity to fully explain the decision in the quarterly Statement on Monetary Policy (SOMP) which printed on November 4.

Undoubtedly the most important development in the Governor’s statement is his observation that “inflation is likely to be consistent with the 2–3 per cent target in 2012 and 2013.” When we last saw the Bank’s inflation forecasts in the August SOMP which followed the August Board meeting (where a rate hike was discussed) the forecast for underlying inflation was 3¼% for 2011, 3% for 2012 and 3¼% for 2013. The November SOMP has forecast underlying inflation at 2½% in 2012 and 2½% to 3% 2013 (a range, as opposed to the point estimate published in August. The fact that there is now confidence that inflation will remain within the target band for an extended period allowed the Bank to deal with the prospects of an economy which is only showing moderate growth.

It is clear that much more consideration is now being given to the slow speed sectors of the two-speed economy. The labour market is described as “now softer”, demand conditions described as “subdued” and considerable emphasis is now being given to the high exchange rate which is described as “had a noticeable dampening effect”. Finally the Bank is firmly in our camp in describing the household sector as having “cautious behaviour.”

We were very encouraged by this rhetoric with respect to the economy since it is much closer to our own view of the economy than had been the Bank’s view over the last year or so.

There is also a much less upbeat description of the external sector. China is now described as having slowed, commodity prices are now recognised as having “generally declined” and global trade is now recognised as being affected by the slowdown in Europe. While the Bank has been consistently more optimistic around Asia than we have been it is clear from the Statement that it shares our sceptical view with respect to Europe’s prospects.

In the aftermath of the rate cut most economists rushed to declare the move as a “one off” or, at most, the first of only two cuts. We continue to differ. Since July we have argued that the easing cycle will be a total of 100bps. We also continue to expect that the next cut will come in February after the Bank gets further evidence on inflation and has time to assess the impact of the first move.

However, with regard to future movements, probably the most important observation from the statement is that the policy stance has not been described as neutral. The general view in the market has been that the neutral cash rate is 4.5%. A movement back to neutral would no longer allow policy to be described as “mildly restrictive”. However, the current stance is described as “more neutral” but not necessarily at neutral. We agree with the assessment that 4.5% is still above neutral mainly because financial conditions as indicated by credit growth, asset prices and the Australian dollar are still consistent with a restrictive policy stance. In recognising that the policy stance may still be in the contractionary zone the Bank has clearly left the door open for more cuts.

For Westpac to move its forecast for the next move forward to December there would have to be an extremely muted response to the latest cut in both business and consumer confidence; a further rise in the unemployment rate and probably an unexpected deterioration in markets.

We view all of those prospects as extremely likely through the first half of next year while recognising that the pre December Board meeting “window” is quite narrow. Nevertheless, with Greece already dislodging global markets again and the prospects for the local October employment report being quite uncertain a cut in December cannot be ruled out.

As a general rule we feel much more confident predicting the economy 6–12 months out and assuming good policy. However, near term RBA decisions are dominated by the current thinking within the Bank. Forecasting month to month moves comes down to forecasting that mood rather than ‘good policy’ per se. Indeed ‘good policy’ would be to cut in December but our assessment of the ‘mood’ argues against it.

Bill Evans, Chief Economist

Mx.The RBA cut in November ...

... in line with our thinking.

Slow speed segments ...

... are receiving more airplay.

The global picture has worsened.

We expect an eventual cycle of 100bps ...

... as we assess that ‘neutral’ ...

... is lower than 4.5%.

Even so, we don’t think ...

... a December cut is likely.


9

Chart 1. Chart 2.

Chart 3. Chart 4.

Chart 5. Chart 6.


Australian interest rates

2

3

4

5

6

7

8

9

2

3

4

5

6

7

8

9

Sep-01 Sep-03 Sep-05 Sep-07 Sep-09 Sep-11

%%

Cash rate3yr swap

Sources: RBA, Factset, Westpac Economics

weekly average

3yr swaps: –1.7%so far

in 2011

3yr swapsbottomed in early March 2009 before the last cut

RBA lowers rates, 3yr swaps well below cash Core inflation decelerates

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

-10123456789

Sep-95 Sep-99 Sep-03 Sep-07 Sep-11

%qtr%yravg RBA core CPI* %qtr (rhs)headline CPI %yr (lhs)avg RBA core CPI* %yr (lhs)

Sources: ABS, RBA, Westpac Economics

* average of s.a. trimmed mean & weighted median CPI ex GST effect in 2000/01

-2

0

2

4

6

8

10

12

-2

0

2

4

6

8

10

12


%%

US 10 yr bond yield AU 10yr bond yield

Sources: Factset, Westpac Economics.

spread

updated 2 Nov

10 year bonds Established house prices decline

-20

-10

0

10

20

30

40

50

Sep-99 Sep-07

Sydney

Melbourne

% ann


-20

-10

0

10

20

30

40

50

Sep-99 Sep-07

BrisbanePerth

% ann

Terms of trade: record high

40

60

80

100

120

40

60

80

100

120


indexindex

Terms of trade, goods & services

Sources: ABS; Westpac Economics

+39%yr from low

77% above avg

Wool boom1950/51

Credit growth subdued

-16

-8

0

8

16

24

32

-16

-8

0

8

16

24

32

Sep-91 Sep-95 Sep-99 Sep-03 Sep-07 Sep-11

Total Housing Business

Sources: RBA, Westpac Economics

3 mth % chg, annl’sd 3 mth % chg, annl’sd

10


Australian dollar

Over the month the AUD showed remarkable resilience, bouncing from 97¢ on October 7 (the timing of our last report), peaking around $1.075 before retracing to around $1.04.

While we like to try to explain AUD in terms of fundamentals like interest rate differentials, net external debt and commodity prices, there are times when AUD is clearly taken ‘hostage’ by the ‘risk on’ – ‘risk off’ trade. Last month was a classic example of this. From its low on October 4 to its peak on October 28 the AUD increased by 14%. Over the same time period the Dow increased by 14.8% and the ASX/S&P200 by 12.4%.

However, some of the variables we track in our models did not fare so well. The Base Metals Index was only up by 7.2% and the Westpac Commodity Futures Index was up by 10%. Of even more interest has been the collapse in the spot iron ore price. Spot iron ore prices have fallen 33% in the last month and are now down 35% from the September peak. More importantly for Australian miners the spot price less freight from WA is now trading at around $110/t. The December quarter pacts settled just under $170/t. Current spot prices imply that the March contracts are likely to fall by around 40% from this level. Due to the high cost of production within China we are not predicting much more of a fall in prices but we do believe that a more meaningful adjustment in the AUD to reflect these developments lies ahead.

The evidence suggests that the fundamental story is not pointing in the same direction as the ‘risk on’ indicators casting some doubt over the sustainability of the recent surge in the AUD. Of course the key swing driver of the risk trade is political developments in Europe. Readers will be aware that Westpac is quite underwhelmed by prospects for stability in Europe. Our core view is that a currency union cannot prosper without a fiscal union. This fundamentally unsound structure ‘survived’ through an unsustainable build up in corporate, household and government debt as interest rates and exchange rates were constrained in their normal role to efficiently price debt. The Global Financial Crisis exposed the vulnerabilities of excessive debt and the ‘system’ is likely to gradually unravel in an environment of rolling financial crises affecting the public, financial and private non-financial sectors. That’s everyone except the foreign sector. Now is not the time to be attempting to ‘export your way out’.

The final week of October represented a short term respite from the crisis but this is unlikely to be sustained. Last month, confronted with an excessively low ‘risk off’ AUD at 94¢ we lowered our target point for end 2011 from $1.00 to 95¢. That is now too low given the recent 14% surge. However we maintain our call that AUD will rest around parity, or just below, by year end as the European challenges dissuade the aggressive ‘risk on’ pricing from being persistent. We have also moved the lowpoint for AUD in 2012 to 93¢ following the sharp upward move in October.

In the mean time a number of core fundamentals should work to lower the AUD. The cut in the RBA’s cash rate had little impact on AUD with risk on/risk off dominating sentiment. Even the fall in the spot iron ore price was ignored when ‘risk on’ dominated. Under ordinary circumstances the combination of lower bulk commodity prices, signs of slowing growth in China, India and non-Japan Asia and a rate cut by the RBA would have been more than enough to see the AUD fall sharply against the US dollar and on a trade weighted basis.

Markets will not remain aloof to these developments for ever. They will soon focus on the implications for Australia’s net debt (less export revenue, certainly in the near term, a diminished trade surplus, wider current account). The prospect of a further narrowing in the interest rate differential should also soon register; while the iron ore price along with sporadic data on the Chinese construction slowdown will also resonate. From an AUD perspective though there is still the interesting question of how long the Chinese authorities will be prepared to wait before easing policy, and how the market interprets the initial announcements. We think that policy moves will be forthcoming quite soon, but they will be only partial offsets for the deceleration in the big levers of the domestic economy and the export slowdown. If the market misinterprets the response as a repeat of the 2008/09 episode - and it most certainly will not be anything like that – then AUD will bounce in the first instance but will lose ground subsequently as reality sinks in.

Bill Evans, Chief Economist

ThxAfter another whippy month ...

... AUD finds itself much higher ...

... than it was just four weeks ago.

It is unlikely to hold these levels long ...

... as the fundamentals ...

... are pointing to depreciation.


11

Chart 1. Chart 2.

Chart 3. Chart 4.

Chart 5. Chart 6.


Australian dollar

AUD/USD & AUD/JPY

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20

Jan-07 Dec-07 Dec-08 Nov-09 Nov-10 Oct-1150

60

70

80

90

100

110USD JPY

AUD/JPY (rhs)

AUD/USD (lhs)

Sources: Factset, Westpac Economics.

AUD/EUR & AUD/NZD

1.00

1.10

1.20

1.30

1.40

Jan-07 Dec-07 Dec-08 Nov-09 Nov-10 Oct-110.4

0.5

0.6

0.7

0.8NZD EUR

AUD/EUR (rhs)

AUD/NZD (lhs)

Sources: Bloomberg, Westpac Economics.

The Australian dollar & 2yr swap spreads

-2

-1

0

1

2

3

4

5

6

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20

Jan 90 Jan 93 Jan 96 Jan 99 Jan 02 Jan 05 Jan 08 Jan 11

%paUSD

AUD/USD (lhs)

AU-US 2yr swap spread (rhs)

Sources: Bloomberg, Westpac

The Australian dollar: USD trend is crucial

0.45

0.55

0.65

0.75

0.85

0.95

1.05

1.15

60

70

80

90

100

110

120

130

Jan-94 Jan-98 Jan-02 Jan-06 Jan-10

index USD

USD majors index (lhs)

AUD/USD (rhs)

Source: RBA

Iron ore prices have collapsed

80

100

120

140

160

180

200

80

100

120

140

160

180

200

Nov-09 Mar-10 Aug-10 Dec-10 May-11 Oct-11

USD/tUSD/t

TSI 62% fines benchmark

3 mth forwardSources: Westpac Economics, Bloomberg, SGX Asiaclear.

Australian dollar & US equities: volatility

5

10

15

20

25

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45

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0102030405060708090

100

Jan-07 Feb-08 Mar-09 Apr-10 May-11

volvol

US equity volatility (lhs)AUD/USD volatility (rhs)

Sources: Bloomberg, RBA, Westpac

12


Beef and dairy

Beef: Better weather equals optimism.The final quarter of the year has thrown up a few positive surprises for the industry. Weather conditions have been better than expected in many beef producing regions. Warm weather has been interspersed with rain events which have provided better than expected conditions and so has provided the market with some stability and some sustained demand. This has been reflected in the fact that the EYCI has defied the usual seasonal downward trend and held up remarkably well. Since the start of September to date, the EYCI has fluctuated no more that 11.75 c/kg.cwt, remaining in a tight range between 393 – 404.75 c/kg/cwt.

The international markets remain hit and miss for Australian exports. The major export market of Japan continues to experience turbulent times and is showing very subdued demand for Australian beef. A weakening economy and the potential further fall-out from the economic woes in Europe are all affecting consumer demand. Additionally, the announcement from Japan that it will participate in the Trans Pacific Partnership has resulted in the Japanese government reviewing the import protocols for US beef. With the strict regulations currently in place, any easing has the potential to increase US imports at the cost of Australian beef imports.

Markets in Korea and the US also remain sluggish. Seasonal factors together with the spectre of the European debt worries are continuing to permeate the market. Business and consumer sentiment remains erratic.

The live export of cattle from Australia lost significant momentum in the third quarter of 2011 as exports to Indonesia suffered a significant blow. On latest figures, exports to Indonesia are running over 53% down on the corresponding period in 2010. The major export destinations for cattle are Indonesia (58.3%), Turkey (9.8%), Israel (7.3%) and China (7.0%). Projected final volumes and values for the year are estimated to be 622,000 head worth AUD545.5 million. On the supply side of the equation, Western Australia (40.4%) and Northern Territory (35.7%) supply the bulk of the export cattle; the other notable supplier is Victoria with a current share of 14.5%.

Dairy: A solid start to the production season.The final quarter of the year is well underway and this is the time for the dairy industry to “hit its straps” with stronger production volumes. Conditions overall have been favourable, although some regions have recently been experiencing cooler, wetter conditions and this is being reflected in production volumes to date. Indeed, milk production across the states is gathering pace as the season progresses, it is now peak period for production volumes. Indicative figures to date show production is around 2.2% ahead of the corresponding period last year, which is in line with seasonal expectations. From latest figures Victoria continues to lead by example and is around 54 million litres (3.6%) ahead of last year’s production and represents 66.8% of total Australian production. NSW is a very distant second, with a seasonal increase of 2.9% representing 12.3% of Australian production.

In the International markets, the export sales year is running slightly behind 2010 levels. Volumes are back 5.3% (171,981 m/t) and value back 7.1% (AUD624.78 million). International prices have remained softer throughout the quarter; however, the latest dairy auction has seen some support for prices. AMF has shown an overall increase of 8% in value to an average of USD3,571/mt , with WMP and SMP showing increases of 2.4% and 1.7% to sell at average prices of USD3,574/mt and USD3,354/mt respectively (prices quoted on FAS basis)

As the northern hemisphere season hits seasonally low levels, supplies begin to tighten. There is some market speculation that an international SMP/WMP/AMF tender will be announced shortly and this is adding some concern that supplies may tighten in the near term.

The export of live dairy cattle continues to make strong returns as 2011 progresses. To the end of August, total shipments amounted to 47,529 head, which is 28.2% down on the corresponding period in 2010. However, while volumes are lower, the value of exports is 10.2% ahead of the corresponding period in 2010, at AUD99.2 million. The average value per head for 2011 shipments is now AUD2,087, this equates to an average increase of AUD134 per head over the 2010 value. The major export destinations for dairy cattle (volume basis) remain China (60.1%), Russian Federation (19.4%), Turkey (6.4%) and Pakistan (4.2%). In value terms, despite Pakistan being a smaller volume market than Turkey, its value is almost 38% greater, averaging a staggering AUD1,323.56 more per head.

Better conditions aid optimism.

International markets remain sluggish.

Seasonal factors hike demand.

Production volumes ahead of the curve.

Export numbers are below 2010.

Market speculation remains.

Live exports continue with good returns.


13

Chart 1. Chart 2.

Chart 3. Chart 4.

Chart 5. Chart 6.


Beef and dairy

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Index, AUD AUD/kg

Export prices *

Eastern Young Cattle Indicator (rhs)

Sources: Bloomberg, MLA, Factset, Westpac Economics

* average

Beef prices

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Sources: MLA, Westpac Economics

Average beef export prices index

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Sources: USDA-FAS, Westpac Economics

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skim milk powder butter

whole milk powder cheese

Sources: USDA, Westpac Economics

Global dairy prices

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Sources: USDA-FAS, Westpac Economics

1997/98 = 100

Dairy prices remain volatile

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Dairy cattle – live exports

14


Grains and oilseeds

Wheat: Technical’s dominate the fundamentals.The final quarter of the year has arrived, the harvest in the northern hemisphere has been completed and a clear picture of the supply side of the wheat balance sheet has been established. The latest USDA report (November 2011) clearly indicates that there is no shortage of wheat. After a stronger than anticipated finish to the US wheat season, global supplies are estimated to be just over 202 million tonnes. Despite a stronger consumption number, production has remained ahead of the curve. While overall wheat volumes are up, there is some conjecture as to the overall volumes of higher quality wheat as opposed to feed and lower grade wheat. There have been market rumours that there could be a tightening in the supply of the higher protein wheat, if this does occur, then this should be a bonus for some Australian producers.

On the domestic scene, all eyes are now on the weather as the Australian harvest gets into gear. The harvest in Western Australia has already commenced and the quality and volume is a significant improvement on the previous year, as conditions have been considerably more favourable. Moving to the eastern states and we almost have a repeat of 2010. Growing conditions have been favourable in the most part; however, late rain has reduced protein yields in some of the northern regions. As the headers begin to roll southwards, what is not needed is the repeat performance of the wet weather that plagued the 2010 harvest.

Current indications are that Australia will have a strong harvest in terms of volumes. Estimations vary, but in the region of 24–25 million tonnes would seem quite plausible after conditions improved throughout the growing season. Despite an active export year, there will be considerable pressure placed on infrastructure and storage capacity as large volumes of wheat remain in storage from the large 2010 harvest. With softer global demand for wheat on the back of increased supplies, it is anticipated that more wheat will find its way to storage and remain there for longer periods of time, unless there are some significant supply/demand issues.

In the international markets, prices have been dictated more by the technical side of the market as opposed to the fundamental side of supply and demand. The volatility and nervousness in the market as a result of the continuing European debt situation, is forcing investors to look at their commodity risk and rebalance their portfolios. This has seen wheat prices bounce around as “buy the rumour, sell the fact” has almost become the status quo.

Coarse Grains & Oilseeds: Production and prices are mixed.Corn prices continue to be lacklustre despite a tightening of supply. Corn production is estimated to ease slightly against a backdrop of steady consumption, leaving a slightly tighter balance sheet. Despite this, price does not seem to be interested in moving higher. With readily available supplies of wheat and the feed-lots able to access plentiful supplies of dried distiller’s grains, there is little incentive for the corn price to be driven higher. A combination of a sluggish US economy, unconvincing corn export numbers, fear and loathing of the European financial woes and slightly softer ethanol demand, have ensured that corn is well off its yearly highs and is now at the mercy of the outside market forces and the technical side of the market.

The Australian canola crop for 2011 is on track to be the largest in 11 years with an estimated yield of just over 2.6 million tonnes – a reflection of the very favourable growing conditions during the season. Good rain at the right time has not only lifted yields, but has also allowed good oil content to be accumulated. According to reports from the Australian Oilseeds Federation, the crushing mills have indicated oil content around the mid 40’s% with some instances up to 49%. With such a strong end to the season, it is anticipated that grower interest in canola will remain well supported as prices have remained relatively firm when compared to other crops. Canola is still attracting prices in excess of AUD$500/mt (as at 21.11.2011)

In the international markets, the poor canola crop in the EU should auger well on the demand side of the equation, particularly with Australia having a larger high quality crop. Still on oilseeds, China demand for soybeans could top 60 million tonnes as demand for vegetable oils and soy meal remains strong. Global supplies of soybeans are not as tight as previous years, so additional demand should help to put a floor in the price. Prices across the coarse grains and oilseed complex are still choppy as the market still remains nervous about the current financial situation in Europe with swings in price occurring on the back of rumour and hearsay.

Global wheat supplies increase.

Will favourable weather conditions hold?

Bumper harvest for Australia.

External forces affect the market.

Corn supplies tighten.

Canola crop continues to improve.

China to increase imports.


15

Chart 1. Chart 2.

Chart 3. Chart 4.

Chart 5. Chart 6.


Grains and oilseeds

05

101520253035404550

1997-98 1999-00 2001-02 2003-04 2005-06 2007-08 2009-10 2011-12(f)

Sources: ABARES, Westpac Economics

Million Tonnes

Australia – winter crop production Wheat prices – 2010/11

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4/01/2010 4/05/2010 4/09/2010 4/01/2011 4/05/2011 4/09/2011

CBOT Wheat Futures- AUD (rhs)

CBOT Wheat Futures- USD (lhs)

AUD/MTSource: Reuters, Westpac Economics

USD/MT

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1983-84 1988-89 1993-94 1998-99 2003-04 2008-09 2013-14(f)

%US¢/bustocks to use (rhs)price (lhs)

Sources: ABARE, Westpac Economics

Wheat dynamics – potential consolidation

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Sources: Factset, Bloomberg Westpac Economics,

Wheat prices – long term

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barley (lhs) corn (rhs)

Sources: Factset, Westpac Economics

World corn and barley prices

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canola (lhs) soybean (rhs)


World canola & soybean prices

16


Sugar and cotton

Sugar: Prices ease as production improves.Sugar has continued to demonstrate relative stability in the remainder of the 2011 season, with price fluctuating by 19% (USc5.61) and currently sitting at around USc24.09/lb. Global sugar production is set to continue its positive trend and increase by 8.6 million tonnes in 2011-12 to a record 175.6 million tonnes. Australian sugar production is forecast to increase to 4.2 million tonnes in 2011–12 compared to 3.6 million tonnes last season as growers continue to rebound after the crop devastation of cyclone Yasi with the 2011 crush well under way. Australian sugar exports are forecast to increase by 10.4% in 2011–12 to 2.78 million tonnes in line with increases to world production, yet the value of exports is expected to fall slightly to around $1.5 billion, on the back of a strong Australian dollar.

Prices in the international market have waxed and waned but remain relatively supported compared to the June 2011 quarter. November saw initial indications that there may be production downgrades in Thailand due to flooding and a further downgrade of the Brazilian crop – primary factors in keeping world prices strong. Over the last 3 months (September 1 – November 22) sugar prices have fluctuated from a high/low of USc29.70/lb on 14.09.2011 to USc24.09/lb on 22.11.2011. Trading has been very thin, with small volumes able to move the market. The outside market influences are making more of an impression far more than the fundamental issues, as the fear and nervousness of the EU debt crisis continued to haunt the markets.

Initial forecasts for Thailand’s 2011–12 harvest had production increasing by over 5% to 10.5 million tonnes after a large 2010–11 harvest. However, recent flooding throughout Thailand has delayed harvest with the potential for a significant production downgrade. Similarly, the remaining Brazilian crop in the Centre South may be downgraded further after frost hurt crops, with output now forecast at only 30.8 million metric tonnes this year down from earlier estimates of 31.6 million tonnes.

Australia’s sugar assets are set to undergo further consolidation with Singapore based Wilmar International poised to purchase Proserpine Sugar for $120 million after the Queensland based company fell into voluntary administration. Mackay Sugar looks to be the next likely takeover target, which would be worth more than the smaller MSF Sugar; MSF is currently the subject of a friendly $313 million takeover bid by a Thai sugar company, Mitr Phol. Cotton: Prices and supply issues ease.Australia’s cotton industry is set to experience a bitter sweet 2011–12 season, with production set to increase by around 27% in 2011–12 to another record 1.1 million tonnes, yet returns at the gin gate are forecast to decrease by 17% to around AUD$545 a bale. This price, while still attractive, is a far cry from the heady days of earlier in the year when prices were touching AUD$1000/bale. Since then, prices have generally moved in one direction, and that is lower.

While price volatility in the international cotton market has remained since the June quarter, it has eased and cotton has traded in a very tight range since the beginning of September. Apart from a brief flirt above USc110/lb in early September, the price has remained trapped between USC110/lb and USc96/lb. The price for cotton has been directly affected not only by a general easing of demand but also from the fall out of the continued macroeconomic uncertainty in Europe. The general nervousness over the EU debt crisis has ensured that many of the technical traders have reduced their risk exposures to commodities and cotton has not escaped the market maelstroms that continue to occur. However, there are some positives as price weakness does attract buyers. The Chinese National Cotton Reserve has also been an active buyer this quarter, taking advantage of lower prices, making its largest purchase of US cotton in eight years. Growers and merchants in the US sold China 996,100 bales in the first week of November, which was the most sold during one week since 2003 and amounted to around 9% of estimated US cotton exports for the season.

World cotton production is forecast to increase by around 9% in 2011–12 to a record 27.7 million tonnes, reflecting the combined effects of relatively high returns from cotton compared to alternatives such as corn and soybeans. The world cotton area harvested is forecast to rise by 6% in 2011–12 to around 36 million hectares, the largest in 17 years, led by increases in production in all major cotton producing countries with the exception of the US.

Australian production looking brighter.

Thin trade keeps prices tight.

Global production to reduce

Consolidation of producers continues.

Increased production but prices back.

China returns as an active buyer ... for now!

Global production set to increase.


17

Chart 1. Chart 2.

Chart 3. Chart 4.

Chart 5. Chart 6.


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MtMt

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ABARE est. & f'cst

Global sugar market - tight in the short term

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Sugar prices ease but still support.

Sugar and cotton

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Cotton prices: retrace rapidly

020406080100120140160180200

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100120140160180200


AU¢/lbUS¢/lb

US¢ (lhs) AU¢ (rhs)

Sources: Bloomberg, Westpac Economics

AU¢ period avg

Cotton prices continue to fall Australian cotton production to surge

200

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Sources: Westpac Economics, ABARE

‘000’ Tonnes

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Sources: ABARE, Westpac Economics, ISO

World sugar prices & stocks

18


Sheep and wool

Sheep & Wool: Markets remain steady.Good news on the size of the Australian flock. After a number of years in decline, the improved demand and increased farm gate prices has seen the flock size increase. According to latest figures from ABS, the Australian flock grew by 9% to 74.3 million head, with an increase in breeding ewes of 1% to 42.8 million. This is the first time since 2004 that an increase has been recorded.

On the wool front, latest forecasts indicate that wool production will show an increase of around 3% for the 2011–12 year to reach 355 million/kg of greasy wool. While the average fleece weight is forecast to fall, the number of sheep being shorn is forecast to increase. Over the last quarter, wool has been on a roller-coaster ride. Certainly the overall trend is downward from its highs earlier in the year; however, there are some rallies. Certainly the woes in the EU and their current debt crisis are playing heavily on the minds of the mills in Europe. The Eastern Market Indicator (EMI) has eased after a brief rally and is back below 1200 ¢/kg, but still well ahead of the corresponding period in 2010.

The export of live sheep through 2011 has continued but at a greatly reduced rate than seen at the corresponding time the previous year. Shipments are currently around 24% lower in volume terms at 1.53 million head. Tighter supplies at the sale yards continue to put some strain on shipments. In value terms, shipments are worth AUD201.9 million, which is around AUD21 million lower than the corresponding period in 2010. While volume & value numbers are down, the price per head is still maintaining a premium and continues to be ahead of previous years, averaging AUD132 against the AUD110 per head at the corresponding period last year. The major Middle Eastern markets of Kuwait, Qatar and Bahrain remain major destinations and between them have accounted for 68.9% of volume. However, Turkey continues to grow in importance for sheep exports. To date, Turkey has received almost 247,000 head and now represents 16.1% which is the third largest market for Australian sheep exports to date.

Lamb & Mutton: Supplies increase but prices hold up.As the final quarter of the year has progressed, the lamb roller coaster continues, with lamb prices slowly starting to re-gather some momentum after a fall over recent months. Sale yard numbers have improved considerably in some regions while easing in others as outside factors start to influence producer decisions. In NSW as the cropping season gets underway in earnest, expect to see numbers at the sale yards ease as the focus falls onto cropping. While paddock conditions are not under any real duress, there is little need to focus on exiting stock. Victoria on the other hand is now awash with new seasons lambs and this is reflected in the increased volumes seen through the sale yards.

The Eastern States Trade Lamb Indicator (18.11.2011) still has Trade lambs at 490 c/kg/cwt and Heavy lambs at 485c/kg/cwt. While this is around similar levels to the corresponding periods last year, (when lamb prices were in significant upward trajectory) it remains well above the long term average and still attractive to producers.

On the international front, Australian lamb exports continue at strong levels. Year to date, lamb exports are running 6% ahead of the corresponding period last year at just over 132,000 tonnes. Good opportunities have been seen in South East Asia and Greater China, particularly for the cuts of shoulder, breast and flap. With the Greater China region entering their peak season for lamb consumption and Australia experiencing a greater supply of lambs, export numbers are expected to improve.

In terms of competition from across the Tasman, the New Zealand lamb season is running around about a month behind seasonal normality. A combination of cooler wetter conditions early in the season slowed growth rates; this followed by a much improved later part of the season has encouraged producers to hold onto lambs to improve condition and weight. This tight supply has led to an increase in price but is being met with some consumer concern, especially in the favoured European markets.

Mutton prices, which have been well supported for a bulk of the year, have continued to ease and now have fallen well below the 400 c/kg (cwt) hurdle to now sit around 340 c/kg (cwt). Competition at the sale yards has been weaker despite the numbers in throughput at the yards also falling. It appears that historically, there is a seasonal easing in prices, however, for 2011; these seasonal factors have started later.

Flock numbers improve.

Increases for wool production.

Sheep export volumes ease.

Lamb prices start to improve.

Prices remain ahead of 2010.

Exports remain strong.

NZ lamb season behind schedule.

Mutton pricing hits seasonal conditions.


19

Chart 1. Chart 2.

Chart 3. Chart 4.

Chart 5. Chart 6.


Sheep and wool

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Lamb Slaughter (rhs) Lamb Market Price (lhs)

Auc/kg/cwt Million

Sources: MLA, Westpac Economics

Lamb slaughter slowly increasing

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Live sheep exports – strong returns continue

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Sources: ABS, MLA, Westpac Economics

Lamb prices – rebuilding momentum

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Wool prices continue above trend

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AUD/kg

Average price

Sources: AWEX, Westpac Economics

AUD/k

Fine wool price remain supported

20



Financial forecasts – Australia

Interest rate forecasts

Dec 11 Mar 12 Jun 12 Sep 12 Dec 12

Cash 4.50 4.25 4.00 3.75 3.75

Market implied* 4.27 3.87 3.69 3.70 na

90 Day Bill 4.50 4.25 4.00 3.75 3.80

3 Year Swap 4.40 4.50 4.60 4.60 4.60

3 Year Bond 3.95 4.05 4.15 4.20 4.25

10 Year Bond 4.30 4.30 4.40 4.50 4.70

10 Year Spread to US (bps) 220 210 200 200 210* Market implied rate is the anticipated target rate in the OIS market. Sources: Bloomberg, Westpac Strategy.

Currency forecasts

Dec 11 Mar 12 Jun 12 Sep 12 Dec 12

AUD vs

AUD index* 102.1 99.7 97.5 100.9 104.4

USD 0.99 0.96 0.93 0.97 1.01

USD forward^ 1.04 1.03 1.02 1.01 1.00

JPY 76 74 71 76 82

EUR 0.75 0.76 0.78 0.79 0.80

NZD 1.30 1.32 1.31 1.29 1.29

CAD 1.01 1.00 1.00 1.01 1.01

GBP 0.65 0.64 0.64 0.65 0.65

CHF 0.90 0.92 0.93 0.94 0.96

DKK 5.59 5.68 5.79 5.87 5.94

SEK 6.64 6.71 6.76 6.77 6.86

NOK 5.78 5.88 6.06 6.06 6.06

ZAR 7.92 8.04 8.17 7.99 7.83

SGD 1.26 1.22 1.18 1.22 1.26

HKD 7.71 7.47 7.22 7.52 7.83

PHP 42.57 41.24 39.90 41.45 42.83

THB 30.69 29.73 28.77 29.83 30.69

MYR 3.18 3.08 2.98 3.09 3.19

CNY 6.29 6.09 5.89 6.12 6.30

IDR 8910 8633 8356 8677 8955

TWD 29.70 28.78 27.85 28.92 29.85

KRW 1124 1089 1053 1090 1119

INR 48.51 46.99 45.48 47.20 48.66

*Nominal trade weighted index, with the latest completed quarter compiling the base. Weights from Reserve Bank of Australia. A reading above (below) 100 indicates a rise (fall) in the AUD. ^Approximate market forward price for AUD/USD, not a forecast. Sources: Bloomberg, Westpac Economics.


21


Economic forecasts – Australia

Activity*

2010 2011 2012 Calendar years

% change Q4 Q1 Q2 Q3f Q4f Q1f Q2f 2009 2010 2011f 2012f

Private consumption 0.6 0.6 1.0 0.6 0.4 0.4 0.5 1.0 2.8 3.0 2.3

Dwelling investment –0.3 2.7 –0.1 –1.1 –2.7 0.8 0.5 –4.2 4.2 1.5 –0.5

Business investment* 0.4 4.9 1.7 1.4 1.3 1.8 2.5 –5.3 –0.1 9.5 8.0

Private demand * 0.4 1.6 1.0 0.6 0.4 0.7 0.9 –0.7 2.2 4.0 3.3

Public demand * 0.8 0.6 –0.3 0.3 0.2 0.1 0.2 2.0 9.3 1.5 0.7

Final demand 0.5 1.4 0.7 0.6 0.3 0.6 0.8 –0.1 3.8 3.4 2.7

Stock contribution 1.0 –0.3 0.8 –0.6 –0.4 –0.1 0.0 –0.4 0.4 0.4 –0.4

GNE 1.4 1.1 1.5 0.0 0.0 0.5 0.7 –0.7 4.2 3.7 2.3

Exports 2.7 –6.6 2.6 3.0 4.0 1.5 1.1 2.6 5.7 –1.0 9.0

Imports 2.5 2.4 4.3 1.8 1.3 1.0 0.9 –9.0 13.7 10.5 6.5

Net exports contribution 0.0 –2.1 –0.5 0.2 0.6 0.1 0.0 2.7 –1.6 –2.7 0.4

GDP (1) 0.8 –0.9 1.2 0.2 0.6 0.6 0.8 1.4 2.7 1.2 2.8

annual chg 2.7 1.0 1.4 1.3 1.0 2.6 2.2 – – – –

Other macroeconomic variables

2010 2011 2012 Calendar years

% change Q4 Q1 Q2 Q3f Q4f Q1f Q2f 2009 2010 2011f 2012f

Employment (1) 0.9 0.3 0.0 0.1 0.2 -0.1 -0.1 0.7 2.7 1.7 0.3

annual chg 3.4 2.8 2.2 1.3 0.6 0.2 0.0 – – – –

Unemployment rate % (1) 5.2 5.0 4.9 5.2 5.3 5.4 5.6 5.6 5.2 5.1 5.5

Wages (WPI) (sa) (2) 1.0 0.8 0.9 0.9 1.0 0.8 1.0 – – – –

annual chg 3.9 3.9 3.8 3.8 3.8 3.7 3.8 2.9 3.9 3.8 3.7

CPI Headline (2) 0.4 1.6 0.9 0.6 0.4 0.9 0.6 – – – –

annual chg 2.7 3.3 3.6 3.5 3.5 2.8 2.5 2.1 2.7 3.5 3.3

CPI average RBA core*** 0.6 0.8 0.8 0.3 0.7 0.6 0.5 – – – –

annual chg 2.4 2.4 2.7 2.5 2.6 2.4 2.1 3.4 2.4 2.6 1.9

Current account AUDbn –8.6 –11.1 –7.4 –4.5 –5.5 –11.5 –15.0 –52.9 –36.0 –28.5 –51.0

% of GDP –2.5 –3.2 –2.1 –1.2 –1.5 –3.2 –4.1 –4.2 –2.7 –2.0 –3.5

Terms of trade annual chg (1) 22.8 23.9 12.9 13.9 9.0 –4.2 –13.6 –9.9 16.2 14.5 –10.0Calendar year changes are (1) period average for GDP, employment and unemployment, terms of trade (2) through the year for inflation and wages. * GDP & component forecasts are reviewed following the release of quarterly national accounts.** Business investment and government spending adjusted to exclude the effect of private sector purchases of public sector assets.*** Excluding tax changes including the proposed Carbon Tax.

Macroeconomic variables – recent history

2010 2011

Monthly data Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct

Employment ’000 –2.3 12.4 –12.1 45.6 –30.1 5.0 14.9 –4.6 –10.4 20.3 –

Unemployment rate % 4.9 5.0 5.0 4.9 4.9 5.0 5.0 5.1 5.3 5.2 –

Westpac-MI Consumer Sentiment 111.0 104.6 106.6 104.1 105.3 103.9 101.2 92.8 89.6 96.9 97.2

Retail Trade %mth 0.2 0.2 0.9 –0.4 1.1 –0.6 –0.2 0.8 0.6 0.4 –

Dwelling approvals %mth 7.5 –9.4 –7.3 7.8 –1.0 –6.2 –2.2 1.2 10.7 –13.6 –

Private sector Credit %ann 3.3 3.2 3.3 3.5 3.3 3.1 2.7 2.9 3.0 3.4 –

Trade balance AUDbn 1.80 1.30 –0.55 1.51 1.64 2.65 2.02 1.82 3.10 – –

22



Forecasts – commodity prices

latest***latest*** Dec–11Dec–11 Mar–12Mar–12 Jun–12Jun–12 Sep–12Sep–12 Dec–12Dec–12 Mar–13Mar–13 Jun–13Jun–13all commodities index# 378 367 303 295 314 335 376 426

bulk commodities index# 612 613 479 478 511 538 591 681

iron ore fines @ 62% (USD/t) TSI 121 90 130 137 145 150 170 185

coal (USD/t)* 173 174 150 139 145 151 164 200

WCFI**# 297 286 253 239 252 275 318 352

crude oil (USD/bbl) Brent ICE 109 106 90 84 88 97 117 132

gold (USD/oz) 1,733 1,600 1,480 1,380 1,418 1,483 1,591 1,670

base metals index# 201 196 168 158 170 188 224 250

copper (USD/t) 7,885 7,750 6,413 5,953 6,516 7,118 8,296 9,244

aluminium (USD/t) 2,141 2,120 1,815 1,707 1,841 2,086 2,582 2,822

nickel (USD/t) 18,712 18,250 15,969 15,139 16,124 17,892 21,408 24,314

zinc (USD/t) 1,952 1,805 1,579 1,497 1,585 1,740 2,046 2,294

lead (USD/t) 2,023 1,900 1,663 1,576 1,668 1,831 2,154 2,415

rural commodities index# 157 155 140 133 139 149 170 185

wool AU¢/kg^ 1,361 1,360 1,340 1,311 1,313 1,356 1,523 1,698

wheat US¢/bu 660 670 586 556 582 629 721 793

sugar US¢/lb 25 25 22 21 22 23 25 27

cotton US¢/lb 99 95 83 79 82 88 100 110

levels % change

annual 2010 2011e 2012f 2013f 2010 2011e 2012f 2013f

all commodities index# 299 383 312 402 31 28 –19 29

bulk commodities index# 452 608 502 645 44 35 –18 28

iron ore (USD/t)* 112 158 123 158 72 41 –22 29

coal (USD/t)* 130 168 146 188 26 29 –13 28

ave coking price (USD/t) 173 240 185 260 35 38 –23 41

ave thermal price (USD/t) 83 108 107 124 8 30 –1 16

iron ore lump contracts (US¢ dltu) 212 297 221 290 90 40 –26 31

iron ore fines contracts (US¢ dltu) 185 260 194 254 91 40 –26 31

coal coking contracts (US$/t) 201 289 231 326 56 44 –20 41

coal thermal contracts (US$/t) 91 122 109 125 30 34 –11 15

WCFI**# 260 312 255 331 16 20 –18 30

crude oil (USD/bbl) Brent ICE 81 110 90 123 14 36 –18 36

gold (USD/oz) 1,227 1,552 1,440 1,562 20 26 –7 8

base metals index# 213 232 171 235 19 9 –26 38

copper (USD/t) 7,564 8,888 6,500 8,672 23 17 –27 33

aluminium (USD/t) 2,190 2,417 1,862 2,672 16 10 –23 43

nickel (USD/t) 21,871 22,860 16,281 22,777 28 5 –29 40

zinc (USD/t) 2,178 2,178 1,600 2,156 12 0 –27 35

lead (USD/t) 2,164 2,369 1,685 2,269 9 9 –29 35

rural commodities index# 125 168 140 175 14 35 –17 25

# Chain weighted index: weights are Australian export shares. * Average Australian export prices fob – Source ABS 5432.0 Merchandise Trade Exports. ** WCFI – Westpac commodities futures index. *** Weekly averages except for bulks. ^ SFE greasy wool future. Sources for all tables: Westpac Economics, Bloomberg, ABS.

Commodity futures contracts

Future contracts latest*** 3rd 6th 9th 12th 18th 24th

TSI iron ore fines @ 62% (USD/t) 121 130 129 127 125 123 122

crude oil (USD/bbl) Brent ICE 109 108 107 106 104 102 100

gold (USD/oz) COMEX 1,733 1,740 1,745 1,751 1,764 na na

aluminium (USD/t) LME 2,141 2,165 2,181 2,208 2,233 2,278 2,321

copper (USD/t) LME 7,885 7,942 7,946 7,948 7,948 7,939 7,926

nickel (USD/t) LME 18,712 18,979 18,999 19,022 19,037 19,018 18,968

zinc (USD/t) LME 1,952 1,958 1,974 1,994 2,012 2,037 2,054

lead (USD/t) LME 2,023 2,042 2,059 2,072 2,084 2,103 2,121


23


Summary of world output

Economic growth forecasts#

Real GDP %ann 2006 2007 2008 2009 2010 2011f 2012f

World 5.3 5.4 2.8 –0.7 5.1 3.9 3.2

United States 2.7 1.9 –0.3 –3.5 3.0 1.8 1.7

Japan 2.2 2.2 –1.5 –6.6 4.3 –0.4 3.2

Euro zone 3.2 2.8 0.3 –4.0 1.7 1.6 –0.6

Group of 3 2.8 2.3 –0.3 –4.1 2.7 1.4 1.1

United Kingdom 2.8 2.7 –0.1 –4.9 1.4 0.9 0.4

Canada 2.8 2.2 0.7 –2.8 3.2 3.0 2.8

Australia 2.6 4.6 2.6 1.4 2.7 1.2 2.8

New Zealand 1.0 2.8 –0.1 –2.0 1.6 2.0 3.7

OECD total 2.7 2.5 –0.1 –3.7 2.5 1.4 1.2

China 12.7 14.2 9.6 9.2 10.3 9.1 8.1

Korea 5.2 5.1 2.3 0.3 6.2 3.6 2.9

Taiwan 5.4 6.0 0.7 –1.9 10.9 4.2 2.2

Hong Kong 7.0 6.4 2.3 –2.7 7.0 5.3 2.7

Singapore 8.7 8.8 1.5 –0.8 14.5 3.1 0.2

Indonesia 5.5 6.3 6.0 4.6 6.1 6.2 5.0

Thailand 5.1 5.0 2.6 –2.4 7.8 3.7 2.3

Malaysia 5.8 6.5 4.8 –1.6 7.2 3.8 1.6

Philippines 5.2 6.6 4.2 1.1 7.6 4.7 2.1

Vietnam 8.2 8.5 6.3 5.3 6.8 5.7 5.2

East Asia 9.8 11.0 7.2 6.0 9.4 7.5 6.4

East Asia ex China 5.7 6.1 3.2 0.4 7.7 4.5 3.0

NIEs* 5.8 5.9 1.8 –0.7 8.4 3.9 2.5

India 9.5 10.0 6.2 6.8 10.1 7.6 7.4

Russia 8.2 8.5 5.2 –7.8 4.0 4.3 4.0

Brazil 4.0 6.1 5.2 –0.6 7.5 3.8 3.4

South Africa 5.6 5.6 3.6 –1.7 2.8 3.4 2.8

Mexico 5.2 3.2 1.2 –6.2 5.4 3.8 2.6

Argentina 8.5 8.6 6.8 0.8 9.2 8.0 3.8

Chile 4.6 4.6 3.7 –1.7 5.2 6.5 3.8

CIS^ 8.9 8.9 5.3 –6.4 4.6 4.6 3.8

Middle East 6.0 6.7 4.6 2.6 4.4 4.0 3.0

C & E Europe 6.4 5.5 3.1 –3.6 4.5 4.3 2.6

Africa 6.4 7.1 5.6 2.8 5.4 5.2 4.0

Emerging ex–East Asia 6.9 7.1 4.7 –0.3 6.1 5.0 4.1

Other countries 7.7 8.4 5.5 2.0 5.2 5.0 3.3

World 5.3 5.4 2.8 –0.7 5.1 3.9 3.2

#Regional and global groupings are weighted using PPP exchange rates updated to reflect ICP 2005 benchmark revisions. Adding ½ppt to the global headline approximates growth under the prior weighting system * “NIEs” signifies “Newly Industrialised Economies” as defined by the IMF, viz; Republic of Korea, Hong Kong SAR, Taiwan Province of China, and Singapore. ^ CIS is the Commonwealth of Independent States, including Mongolia. Sources: IMF, Westpac Economics.

24

Notes

25

Notes

26

Notes

Corporate directory

Publication enquiries, Neil Burgess, Senior Commodity Analyst, Agribusiness Telephone: (61 2) 8253 7912

SydneyLevel 2, 275 Kent StreetSydney NSW 2000Telephone (61-2) 8254 8372Facsimile (61-2) 8254 6934

Bill EvansChief Economist

Andrew HanlanSenior Economist

Matthew HassanSenior Economist

Huw McKaySenior International Economist

Justin SmirkSenior Economist

Elliot ClarkeEconomist

SydneyLevel 29, Westpac Place275 Kent Street Sydney NSW 2000 Telephone (61-2) 9220 1083Facsimile (61-2) 8253 0955

Graham JenningsChief Executive, Commercial and Agribusiness, Regional BankingTelephone (61-2) 8254 1083

Rick AylettState General Manager, Commercial and Agribusiness, Regional Banking VICTelephone (61) 427 249 059

Rodney KellyState General Manager, Commercial and Agribusiness, Regional Banking QLDTelephone (61-7) 4688 6063

Ben MariniState General Manager, Commercial and Agribusiness, Regional Banking WATelephone (61-8) 9426 2831

Steve HannanState General Manger, Commercial and Agribusiness, Regional Banking NSW Telephone (61-2) 6580 3926

Richard HockneyState General Manager, SA/NT/TAS Regional, Westpac Retail & Business Banking Telephone (61-8) 8230 2225

Westpac Commercial and Agribusiness BankingWestpac Economics

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