Record iron ore exports to boost miners dividend payouts

International trade; Weekly payroll & jobs

What happened? The value of merchandise goods exports rose by 7.5 per cent in June to a record high of $41.3 billion in June. The goods trade surplus hit a record high of $13.3 billion in June, with the value of merchandise goods imports up 8.2 per cent in the month to $28.0 billion.

Implications: Aussie-listed materials companies are expected to dominate the upcoming August company reporting season. The miners are benefitting from elevated commodity prices, the housing boom, China infrastructure spending and fiscal discipline, which has boosted free cash flow. Bloomberg estimates that materials companies, which includes builders, could boost dividend payments by around 70 per cent in 2021. The payout ratios could be even higher for iron ore producers, such as Fortescue Metals, BHP and Rio Tinto.

Other economic data: National payroll jobs fell by 1.0 per cent over the fortnight to July 3 but were up 6.0 per cent on a year ago. Greater Sydney payroll jobs fell 1.9 per cent over the two-week period ended July 3.

The trade data is instructive on income flows in the economy and consumer and business activity and has implications for the currency. Job vacancies are a key gauge of future employment.

What does it mean?

• Australia’s export market remains a vital cog supporting incomes, jobs and regional economies during the pandemic. With the spread of the Covid-19 Delta variant prompting persistent lockdowns in Australia’s capital cities, agricultural and minerals-related shipments to major trading partners takes on even greater importance. And exporter demand is set to be boosted by the weaker Aussie dollar, providing the federal government with a much-needed fiscal windfall.

• While tensions between Australia and our largest trading partner persist, China’s insatiable appetite for iron ore lifted the value of Aussie merchandise goods exports to fresh record highs in June. In fact, overall Aussie shipments to China spiked 8.2 per cent in June to $19.1 billion, topping the previous sales record of $17.7 billion in May, driven by a 7 per cent lift in iron ore exports to $14.9 billion.

• The overall value of Aussie iron ore shipments hit an historic high of $17.6 billion in June, accounting for almost half of Australia’s total export income in the month. The value of exports for food and live animals; crude materials; crude animal and vegetable materials; chemical materials and products all hit historic highs in June.

• Aussie-listed materials companies are expected to dominate the upcoming August company reporting season. The miners are benefitting from elevated commodity prices, the housing boom, strong Chinese infrastructure spending and fiscal discipline, which has boosted free cash flow.

• Bloomberg estimates that materials companies, which includes builders, could boost dividend payments by around 70 per cent in 2021. The payout ratios could be even higher for iron ore producers, such as Fortescue Metals, BHP and Rio Tinto. Consensus dividend yield estimates for the first half of 2021 are 8.0 per cent for Fortescue Metals, 5.5 per cent for BHP and 5.1 per cent for Rio Tinto.

• The weekly ABS measure of national payroll jobs fell by 1.0 per cent over the fortnight to July 3, as lockdowns and school holidays weighed on labour demand. Australia’s jobs recovery has been stunning with the unemployment rate falling to 10½-year lows of 4.9 per cent in June. But the outlook for the labour market is highly uncertain with Australia’s two largest workforces (Greater Sydney and Greater Melbourne) both in lockdown for the foreseeable future. Already Greater Sydney’s payroll jobs have declined 1.9 per cent over the fortnight to July 3 with the Delta variant threatening the Harbour City’s pandemic job gains.

What do you need to know?

Preliminary international trade – June

• According to the Australian Bureau of Statistics (ABS), in original terms, the value of exports of goods was up 7.5 per cent in June to a record high of $41.3 billion. The value of imports rose by 8.2 per cent to $28.0 billion. The trade surplus hit a record high of $13.3 billion in June.

• Rural exports rose by 4 per cent in the month to be up 36 per cent on the year. And non-rural exports were up by 7 per cent to be up 37 per cent on the year. Non-monetary gold exports jumped 18 per cent in the month but were down 9 per cent on a year ago.

• Within exports, the ABS noted: “Metalliferous ores increased to a record high of $20,494 million. Also driving the metalliferous ores increase was copper ore, up $302 million (+55 per cent) to $847 million. Coal increased to its highest value since April 2020 driven by hard coking coal, up $332 million (up 24 per cent) and thermal coal, up $164 million (up 10 per cent).”

• Within imports, the ABS noted: “The increase in petroleum was driven by diesel, up $460m (up 45 per cent) to $1,476 million and crude oil, up $232 million (up 46 per cent). Road vehicles increased to a record high of $4,244 million. Specialised machinery increased $285 million, to the third highest monthly value, $1,272 million, driven by mechanical appliances and machines, and combine harvester-threshers.”

Weekly payrolls – Fortnight ended July 3

• The Bureau of Statistics (ABS) reported that national payroll jobs fell by 1.0 per cent over the fortnight to July 3 but were up 6.0 per cent on a year ago.

• Over the fortnight to July 3, the biggest payroll job losses were in NSW and the Northern Territory (both -1.4 per cent), followed by Western Australia (-1.1 per cent) and Queensland (-1.0 per cent).

• Payroll jobs decreased by the most over the fortnight to July 3 in Transport, postal and warehousing (-3.0 per cent) and Professional, scientific and technical services (-2.5 per cent).

• The ABS has suspended its wage estimates around the end of financial year period.

Published by Ryan Felsman, Senior Economist, CommSec