regional report june2004 - westpac · past performance is not a reliable indicator of future...

23
Regional Economic Report Winter 2004 n The southeastern mainland has had a very dry start to the year and remains hampered by drought conditions. n Those areas with adequate rainfall are facing a more optimistic year with solid farm commodity prices. n The resource sector is riding the boom of high commodity prices created by a strong global recovery and surging demand from China. n Westpac is forecasting the RBA to raise interest rates near the end of 2004 while the dollar is to trade in a US 68¢ to US 72¢ range.

Upload: others

Post on 26-Jul-2020

0 views

Category:

Documents


0 download

TRANSCRIPT

Page 1: Regional Report June2004 - Westpac · Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort

RegionalEconomic ReportWinter 2004

� The southeastern mainland has had a very dry start to the year and remains hampered by drought conditions.

� Those areas with adequate rainfall are facing a more optimistic year with solid farm commodity prices.

� The resource sector is riding the boom of high commodity prices created by a strong global recovery and surging demand from China.

� Westpac is forecasting the RBA to raise interest rates near the end of 2004 while the dollar is to trade in a US 68¢ to US 72¢ range.

Page 2: Regional Report June2004 - Westpac · Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort

Contents

Executive summary 3

Regional Australia economic outlook 4

The Australian economy and interest rates 6

The international economy continues to strengthen 8

The Australian dollar outlook 10

Regional industries 12

Regional dwelling approvals charts 22

Westpac Institutional Bank is a division of Westpac Banking Corporation ABN 33 007 457 141. Information current as at date above. This information has beenprepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider itsappropriateness, having regard to your objectives, financial situation or needs. Westpac's financial services guide can be obtained by calling 132 032, visitingwww.westpac.com.au or visiting any Westpac Branch. The information may contain material provided directly by third parties, and while such material is publishedwith permission, Westpac accepts no responsibility for the accuracy or completeness of any such material. Except where contrary to law, Westpac intends by thisnotice to exclude liability for the information. The information is subject to change without notice and Westpac is under no obligation to update the information orcorrect any inaccuracy which may become apparent at a later date. Westpac Banking Corporation is regulated for the conduct of investment business in the UnitedKingdom 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] fax us on +61 2 9284 9336 or write to Westpac Economics at Level 5, 255 Elizabeth Street, Sydney NSW 2000. Please state your full name, telephone/faxnumber and company details on all correspondence. © 2004 Westpac Banking Corporation. Past performance is not a reliable indicator of future performance. Theforecasts given in this document are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are basedare reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differsubstantially from these forecasts.

The Westpac regional economic reportis a quarterly publication produced byWestpac Economics

Editor:Justin Smirk, Senior EconomistEmail: [email protected]

Page 3: Regional Report June2004 - Westpac · Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort

Regional Australia, Economic Report

Executive summary

3

Regional Australia is facing a significant divergence in economic activity. Southern NSW, northernVictoria and the far eastern part of South Australia are still facing significant long-term rainfall deficienciesand a large part of NSW and Victoria remain drought declared. However, there are parts of regionalAustralia that are facing a brighter outlook. Those towns dependent on resources are riding acommodities boom based on a solid global recovery that is being boosted by rising demand from China.This is exemplified by employment in mining rising to levels that we have not seen since since the late1980s. In addition, those regions that have received adequate rainfall are also getting the benefit ofrobust farm commodity prices and a retreat by the Australian dollar. Coastal towns in regional Australiaare also benefiting from the very modest nature of the current correction to the Australian housing market.

We are, however, expecting 2004 to be the peak for world growth and commodity prices. Robustdomestic demand, stabilising housing lending and a recovery in exports also point to higher interest rateshere. However, as the US has further to go raising interest rates compared to Australia, and theAustralian current account deficit remains stubbornly close to cyclical highs, the Australian dollar isforecast to weaken in 2005.

A robust domestic economy, a recovery in global exports and an extra fiscal stimulus all point to higher Australianinterest rates. The focus for interest rates remains inflation concerns, the housing market and the pace of credit growth. Newhousing lending continues to run well in excess of the Reserve Bank’s ‘target’. In addition, the payments to the householdsector and the tax cuts announced in the May budget are likely to push consumer spending growth back above trend. As such,we retain our view that the RBA will increase interest rates by 0.25% in December.

The international economy continues to strengthen in 2004 but higher interest rates in the US, and the recentintroduction of controls to slow growth in China, will see global growth ease but remain robust in 2005. Recenteconomic data from the US has softened but nevertheless, the US has embarked on the long journey to higher interest rates.European domestic demand stagnation means that interest rates there will remain on hold while recent data from Japan isproviding a very robust update on that economy. A great relief for Asia, and Australian resource exports, was the MayChinese data, which provided the first installment of the awaited "soft landing".

We have revised our Australian dollar forecast from the Autumn Regional Report and now expect it to stay withinUS 68¢ to 72¢ range for the remainder of 2004. Over the last month, the dollar traded in the lower half of the range andthe first 0.25% rate rise by the US Federal Reserve had no discernible impact. However, as the market has begun todiscount the expected pace of interest rate rises in the US, the US dollar has again weakened and the Australian dollar hasrisen. It is this shifting in US interest rate expectations that is going to keep the Australian dollar range bound. The factorsbehind Westpac's forecast weakening in the Australian dollar in 2005 are the forecast fall in commodity prices as worldgrowth slows and the continuation of a cyclical high for the current account deficit.

Page 4: Regional Report June2004 - Westpac · Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort

Regional Australia, Economic Report

Dry conditions in the southeast but booming resourcesDry conditions prevail in thesouth-east of Australia.

The lack of rain is frustratinggiven the current strength incommodity prices.

Resources are, however,booming.

Commodities prices arebeing lifted by strong globaldemand.

Farm employment remains atdrought lows.

Consumer sentimentremains robust.

Signs the housing marketmay be stabilising.

4

Following a promising start to the year, weather conditions deteriorated in autumn inthe south and southeast of Australia. The autumn rains failed across large areas ofsoutheast and southern Australia and parts of southwest WA and to top this off, aboveaverage maximum temperature so far this year magnified the impact of the poorrainfall. Above average June rainfall eased some short-term deficiencies but longer rundeficiencies continue in southern NSW, northern Victoria across to eastern SA.

The lack of rain is very frustrating, especially given the current strength in commodityprices. The retreat of the Australian dollar from the February peak has also been addedplus for our exporters. The seasonal outlook for the remainder of 2004 remainspositive with the southern oscillation index turning positive again but potential yieldsare nevertheless still constrained by the lack of an early break to the season.

As a result, there is a divergence in the outlook for the two main regional industries.Australia's resource sector is booming on a banquet of global economic recovery andrising demand from China. By comparison, farm production is being held back bycontinued dry conditions.

Prices for major mineral and energy commodities are forecast peak in 2004 as higherdemand based on the global recovery also peaks. The positive momentum to date hasresulted in an expansion in mine activity with total mine employment rising to levelsnot seen since late 1989. Given the rise in productivity achieved since then, this is asignificant milestone for the industry. As the growth in global demand slows in 2005,and supply increase in response to higher prices in 2004, prices for most commoditiesare expected to fall.

Farm employment is still struggling to recovery from the drought. Almost 100thousand farm jobs were shed during the drought and while there were promisingsigns in 2003 that farmers were again hiring, the June ABS labour force surveysuggests farmers may be again shedding jobs. If rainfall does not come soon to thedry regions soon, this situation is unlikely to change before 2005. These jobs lossesremain a significant drag on the regional economy.

There is also another clear split in the regional economy between the coastal townsand the inland towns. The earlier group, which has been growing more rapidly due totourism and/or “sea change” lifestyles, may be the reason behind the rise in regionalconsumer sentiment since the March quarter. As a result, the Westpac–MelbourneInstitute Regional Consumer Sentiment remains around the decade high suggesting theconsumer sector will remain a positive for the regional economy.

In the Autumn Regional Report, we highlighted early signs of the heat being releasedfrom the housing market. While anecdotes of falling house prices continue to grabheadlines, this "collapse" has not appeared in the hard data. In fact, we have actuallyseen a stabilisation in the ABS housing data. All of the talk of falling house pricesmay have renewed the interest of potential house buyers, which had been squeezedout of the market.

The regional "is now a good time to buy a house?" index from the ConsumerSentiment survey bounced back over 100 in the June quarter suggesting more peoplethought it was a good time to buy a house than not. This rebound in interest inhousing along with current sound economic fundamentals, suggests the currenthousing downturn will be a modest one compared with previous cycles.

Page 5: Regional Report June2004 - Westpac · Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort

Regional Australia, Economic Report

A positive yet patchy start for regional Australia

5

Mining jobs at late 1980’s levels

70

75

80

85

90

95

100

105

110

Dec-84 Dec-87 Dec-90 Dec-93 Dec-96 Dec-99 Dec-02

no.'000

70

75

80

85

90

95

100

105

110no.'000

Source: ABS

Farming jobs have receded in dry conditions

340

360

380

400

420

440

460

Jun-85 Jun-88 Jun-91 Jun-94 Jun-97 Jun-00 Jun-03

no.'000

340

360

380

400

420

440

460no.'000

Source: ABS

Regional index of consumer sentiment

55

70

85

100

115

130

Jun-80 Jun-84 Jun-88 Jun-92 Jun-96 Jun-00 Jun-04

index

55

70

85

100

115

130index

Source: Westpac-Melbourne Institute

Regional - is it a good time to buy a house?

25

50

75

100

125

150

175

Jun-77 Dec-81 Jun-86 Dec-90 Jun-95 Dec-99 Jun-04

index

25

50

75

100

125

150

175index

Source: Westpac-Melbourne Institute

The Southern Oscillation Index

-30

-20

-10

0

10

20

30

Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04

index

-30

-20

-10

0

10

20

30index

monthly soi 5 month mean soiSource: Bureau of Metorology

Chart 2.Chart 1.

Chart 3. Chart 4.

Chart 5. Chart 6.

Drought re-appearing in the southeast

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

Page 6: Regional Report June2004 - Westpac · Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort

Regional Australia, Economic Report

The Australian economy and interest ratesThe RBA will move inDecember.

Housing credit remains thekey.

Lending has proved resilient.

Fundamentals remainsupportive ...

... indicating another nudgefrom the RBA.

Fiscal stimulus will boostconsumption.

The construction downturnlooks modest.

6

We have retained our view the Reserve Bank of Australia will feel the need to nudgerates further in December by 0.25%. Following this, there is every likelihood that themarkets will price in a further increase in 2005.

The focus of policy remains on the housing market and the pace of credit growth.Following the two rate increases in November and December, we saw a 20% fall innew lending over the three months to January. That has subsequently been followedby a 3% "bounce" in lending to May. That has new lending running at $12.4bn permonth, well in excess of the Reserve Bank's implied target of $9bn to $10bn.

More specifically, lending for owner-occupiers has rebounded by 7.8% from its low.For investors, overall lending is down a mild 3.6% over the same period. The recentdata for investors is proving to be far more resilient than many, including ourselves,had expected.

The resilience in finance applications for owner-occupiers can be explained by therelatively low interest rate; a 23-year low rate of unemployment; and, the high level ofconsumer confidence. It does, however, appear that recent reports of poor returns for"off the plan" investments is having an effect on investor behaviour. In April, loans toinvestors for construction of new dwellings had fallen by 40% from their high inAugust last year. Loans to investors for established dwellings were down 17.5% fromtheir high. The May update did close this gap somewhat but lending for "new" remainsa laggard. As loans to investors for established dwellings represent 92% of totalinvestment lending, it is not wise to concentrate on the "off the plan" portion of themarket. Even though rental yields are near record lows, vacancy rates are back offfrom their highs. As such, investors in established dwellings appears to be resilient tothe adverse publicity and reported losses from "off the plan" investments.

At this stage, the prospects for the Reserve Bank achieving its "target" new loan rateof $9bn to $10bn per month appear remote. When that becomes clear, and growth indomestic demand holds around trend, we expect the Bank to see the need to act. Thecontinuing strength of the economy is likely to "cushion" any impact of furthertightenings and minimise the risk of a policy mistake from over-tightening. When thisbecomes apparent to the market, there is a very good chance it will move to price intwo rate hikes. Markets are never happy with a solo move.

Other factors for the economy appear to be pointing to solid growth. Due to theslowdown in residential construction and spending on renovations and additions weoriginally "pencilled in" a slowdown in consumer spending to a "below trend" 3½%in 2004/05. The payments to the household sector and the tax cuts announced in theMay Budget are now likely to push consumer spending growth back above trend,leading to an increase in our domestic demand growth.

To date, the downturn in the residential construction cycle has been the mildest of thefive documented downturns since 1980. That is not surprising given the modestinterest rate cycle. We also estimate that current over-supply in residential housing isconsiderably below previous cycles, supporting the outlook for a moderate downturn.

Page 7: Regional Report June2004 - Westpac · Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort

Regional Australia, Economic Report

The Australian economy and interest rates

7

Chart 2.

Chart 3. Chart 4.

Chart 5. Chart 6.

Chart 1.

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

Dwelling supply & demand

0

25

50

75

100

125

150

175

200

225

Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03

'000

-60-50-40-30-20-1001020304050

net balance of housing stock (rhs)

underlying demand, annual (lhs)

approvals (lhs)Source: ABS, Westpac

%

Dwelling approvals downturns

40

50

60

70

80

90

100

110

120

0 3 6 9 12 15 18

index

40

50

60

70

80

90

100

110

120index

1985 1989 1994 2000 2004

Source: ABS, Westpac

months

Total private approvals

Lead indicator points to healthy job gains

-60

-50

-40

-30

-20

-10

0

10

20

30

Jun-80 Jun-84 Jun-88 Jun-92 Jun-96 Jun-00 Jun-04

% ann

-6

-4

-2

0

2

4

6% net

Westpac labour marketcomposite - adv 2 qtrs (lhs)

employment growth (rhs)

Source: ACCI, Westpac, ABS

Investor housing finance

0

1

2

3

4

5

6

7

Jun-00 Jun-01 Jun-02 Jun-03 Jun-04

AUDbn/mth

0

1

2

3

4

5

6

7

new established

Source: ABS

AUDbn/mth

-2

0

2

4

6

8

10

12

Jul-94 Jul-96 Jul-98 Jul-00 Jul-02 Jul-04*

% pa

-2

0

2

4

6

8

10

12% pa

spread US Aust

Source: Factset

10-year bonds ease post Fed tightening 3-year bond yield hugs cash – for now

3

5

7

9

Jun-96 Jun-98 Jun-00 Jun-02 Jun-04

%

3

5

7

9%

Australian cash rate

3 year bond yield

Source: Factset

Page 8: Regional Report June2004 - Westpac · Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort

Regional Australia, Economic Report

International economy continues to strengthenThe US has started the longjourney to higher interestrates.

Recent US data hassoftened but a solid growthenvironment remains.

European stagnation meansrates will remain on hold in2005.

The Japanese economy isturning domestic.

China is heading for a softlanding.

8

The US Federal Reserve has begun the long journey back to a more normal level ofinterest rates with a June 30 hike. We expect a 2.25% Fed funds rate by year-end,against 2.0% market pricing. For end 2005, we expect 4.0%, versus our marketestimate of 3.0%. Thus we remain bullish on US dollar prospects versus theEuropean and commodity blocs – the Australian dollar, Canadian dollar, and the NZdollar – in 2005. The lingering structural problems that weighed on the US dollarthrough 2003, that is the current account deficit, will be serviced via an appreciationof the Asian currency bloc.

Recent US data has been more indicative of an economy losing, rather than gaining,momentum. Most notably, the various manufacturing surveys have come off the boiland the June payroll data was disappointing. Payroll data is notoriously volatile frommonth to month and the latest data has not changed our view that strong labourmarket outcomes will be achieved going forward. Other data over the coming monthsmay also exhibit waning momentum, in particular consumer spending. High gasolineprices and the lack of rebate cheques were factors in June. But this must be viewedwithin the context of a solid growth environment. We retain our 2004 US economicgrowth forecast of 4.5%, matching that achieved in both 1997 and 1999, to be thestrongest year since 1984.

In Europe, the Central Bank has reiterated both upside and downside risks to thegrowth outlook in its July statement. However, only upside risks to the inflationoutlook were noted. Despite this, the Bank's chief insisted that it had no "bias", whichmay be a sign that the Bank acknowledges it has little influence over the main factordriving inflation higher, energy prices. Recent data highlighted the relative stagnationof domestic demand, particularly in Germany. We do not expect any monetary policyaction from the ECB until Q2 next year. The Bank of England retains a tighteningbias, and will raise rates again in August.

The June quarter Bank of Japan Tankan survey was an exceptionally robust update onthe economy. Both the large manufacturers and large non-manufacturers conditionsmeasures are now at post-bubble highs. Capital spending plans have been revisedupwards aggressively across the board. Very importantly, stronger activity outcomesare eating into the excess capacity evident in the economy over most of the pastdecade. We remain bullish on the yen, with the current account surplus around 3% ofGDP pointing unambiguously to appreciation.

In East Asia, the first installment of China's much awaited tele-movie "The SoftLanding" appeared on cue in the May data. That was a great relief for the region, forresource stocks, and the currency markets. The early stages suggest that theadministration is succeeding in engineering a controlled slowdown in selectedsectors. In Korea, consumption continues to disappoint. That will keep the Bank ofKorea on hold despite higher inflation and rapid export growth. Elsewhere, a sweetspot for both global growth and the tech sector is undergirding activity. We maintaina constructive view on regional exchange rates moving higher against the US dollarand the euro for 2004H2 and into 2005.

Page 9: Regional Report June2004 - Westpac · Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort

Regional Australia, Economic Report

International economy continues to strengthen

9

Chart 1. Chart 2.

Chart 3. Chart 4.

Chart 5. Chart 6.

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

US Growth – 2004 a boomer

-1

0

1

2

3

4

5

6

1988 1990 1992 1994 1996 1998 2000 2002 2004

%

-1

0

1

2

3

4

5

6%

forecast

Source: Westpac

TANKAN & broader activity measures

-6

-4

-2

0

2

4

6

Q1 94 Q3 95 Q1 97 Q3 98 Q1 00 Q3 01 Q1 03 Q3 04

%yr

-50

-40

-30

-20

-10

0

10net %

non-manufacturing Tankan* (rhs)

PCE (lhs)

*large firms' current business conditions

Source: Bank of Japan, Cabinet Office

Euroland PMI surveys suggest slower growth

45

50

55

60

65

Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04

index

-0.5

0

0.5

1

1.5qtr % ch

Euroland GDP (rhs)

Euroland Comp PMI

Westpac Q2 forecastSource: Reuters, Factset, Westpac

BoE has more work to do, but ECB on hold

0

1

2

3

4

5

6

7

8

Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04

% pa

0

1

2

3

4

5

6

7

8% pa

Bank of England repo

Buba (pre 99)/ECB repo

forecastsource: Factset & Westpac

Asia-Pac semi sales & the OECD leading index

-60

-45

-30

-15

0

15

30

45

60

Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Nov-01 Nov-02 Nov-03-9

-6

-3

0

3

6

9%ann%ann

Asia-Pacific semiconsales (lhs)

leadingindex (rhs)

Source: SIA, OECD

US household wealth back above 2000 peak

25

30

35

40

45

50

Dec-95 Dec-97 Dec-99 Dec-01 Dec-03

USDtr

25

30

35

40

45

50USDtrSource: US Federal Reserve

Page 10: Regional Report June2004 - Westpac · Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort

Regional Australia, Economic Report

The Australian dollar outlookWe now see the Australiandollar in a range for 2004.

The first Fed hike had littleimpact on exchange rates ...

... but the forward profileundoubtedly will.

We disagree with the marketon the Fed and RBA.

Commodity prices will not re-visit their highs.

Australia’s external accountslook stretched.

10

Since the Autumn Regional Report, we have revised our forecast for the Australiandollar an now expect it to stay within the US 68¢ to 72¢ range for the remainder of2004. The next big move will be for general weakness in 2005.

Over the last month the dollar has trended primarily within the weaker half of ourexpected range, i.e. between US 68¢ and 70¢. The 0.25% rate rise in the US and thesteady policy by our own Bank were largely anticipated and had no discernibleimpact on the currencies. The major event over the period was the surprising weakUS payrolls growth for June, which pushed the Australian dollar from 70.2¢ to71.35¢. That was purely a US event since the Australian dollar was little changedagainst the yen and the euro.

The US market moved to price out one 0.25% increase in US interest rates by year'send on the weak payrolls number, with the most likely candidate being the politicallysensitive September meeting. We expect this to be transitory as the momentum in theUS economy recovers and markets re-price a more realistic rate increase profile.

It is true that the interest rate markets have priced out any rate hike by the ReserveBank of Australia by year's end. But we still expect such a move. Indeed, once themarkets recognise the need for one move they are likely to price in a second.Offsetting that will be an expected reassessment of the likely rate profile for the USFederal Reserve. We assess that markets are currently pricing in a total of around 1%in tightenings by the Fed in 2005. We expect that this will eventually move to benearer 2%. As such, there is plenty of scope for expected interest rate differentials tofavour the US dollar against the Australian dollar over the course of 2005.

The other key factor behind Westpac's 2005 view of a weakening Australian dollarrelates to the likely fall in commodity prices as world economic growth slows. Theimportance of commodity prices for the Australian dollar was emphasised last month.Westpac's commodity futures price index fell around 4% in the first three weeks ofthe month but subsequently recovered all lost ground. That profile reinforced the USdollar moves and mirrored the Australian dollar trajectory.

Australia's current account deficit remains the last key factor. The deficit peaked inthe June quarter last year at 6.5% of GDP and has subsequently improved to 5.9%.As with previous cycles the key driver of recovery has been a surge in exports,usually associated with world recovery. In this cycle the export recovery has beenweaker than in most other recoveries but, more importantly, import growth has alsoremained very strong. We are predicting solid 4% growth in domestic demandthrough 2004/05, which will limit the slowdown in imports necessary for the typicalcyclical improvement in the current account deficit. Inertia in the current accountdeficit is likely to be an ongoing negative for the Australian dollar in 2005.

Page 11: Regional Report June2004 - Westpac · Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort

Regional Australia, Economic Report

The Australian dollar outlook

11

Chart 2.Chart 1.

Chart 3. Chart 4.

Chart 6.Chart 5.

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

AUD/USD & AUD/JPY

0.45

0.50

0.55

0.60

0.65

0.70

0.75

0.80

Dec-97 Dec-98 Dec-99 Jan-01 Dec-01 Jan-03 Jan-04

JPYUSD

50

55

60

65

70

75

80

85

90

AUD/USD (lhs)

AUD/JPY (rhs)

Source: Factset

Westpac Economics versus the market

0 0.5 1 1.5 2 2.5 3 3.5 4 4.5

Jul-04

Aug-04

Sep-04

Oct-04

Nov-04

Dec-04

Dec-05

%

implied & forecast Fed Funds rate

FF futures market

Westpac

Source: Bloomberg, Westpac

AUD/USD & AUD/JPY

0.45

0.50

0.55

0.60

0.65

0.70

0.75

0.80

Dec-97 Dec-98 Dec-99 Jan-01 Dec-01 Jan-03 Jan-04

JPYUSD

50

55

60

65

70

75

80

85

90

AUD/USD (lhs)

AUD/JPY (rhs)

Source: Factset

Current account deficit

-7

-6

-5

-4

-3

-2

-1

0

Dec-81 Dec-85 Dec-89 Dec-93 Dec-97 Dec-01 Dec-05

% GDP

-7

-6

-5

-4

-3

-2

-1

0% GDPSource: ABS, Westpac Economics

forecast

0

20

40

60

80

100

Jul-00 Jul-01 Jul-02 Jul-03 Jul-04

%

-10

-5

0

5

10%

percentage surprise index (lhs)

USD index, 8wk change (rhs)

Softer US data weighing on USD

Source: Westpac, Bloomberg

AUD/EUR & AUD/NZD

0.45

0.50

0.55

0.60

0.65

0.70

0.75

Dec-97 Dec-98 Dec-99 Jan-01 Jan-02 Feb-03 Feb-04

EUR

1.0

1.1

1.2

1.3

1.4NZD

AUD/EUR (lhs)

AUD/NZD (rhs)

Source: Factset

Page 12: Regional Report June2004 - Westpac · Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort

Regional Australia, Economic Report

Regional industries: agribusiness

A small rise in Australianfarm production butcommodity prices to ease.

The Australian dollar willprovide only a modest offset.

Wheat prices to fall onincreased production.

Poor rainfall will see a fall inAustralian wheat production.

Increased production willplace course grain pricesunder downwards pressure.

12

Global prices have peaked but a weaker dollar will help a littleABARE is forecasting farm production to rise 1% in 2004/05 based on average seasonalconditions. Total crop production is forecast to rise 2% while a rebuilding of the flocksand herd following the drought is expected to lead to decline in the number of cattle andsheep slaughtered. Since the release of ABARE’s forecasts, below average rainfall haspersisted in the south and southeast of Australia and the outlook for these regionsremain, at best, average.

As a result of lower prices and continued herd and flock rebuilding, ABARE isforecasting a fall in total farm income. With farm costs continuing to rise, the net valueof farm production is forecast to fall by $1 billion or 16% in 2004/05. A further risk forour farmers is a fall in global commodity prices. At the start of 2004, the US dollar priceof Australia's farm commodities peaked at levels not seen since the early 1990s. Sincethen the US dollar price of our farm commodities have fallen 3½% but there has been amore than compensating offset in a 9% fall in the Australian dollar. However, Westpac isforecasting the Australian dollar to fall only a further 2½%, so the currency will offeronly a small buffer to any further weakness in prices.

WheatGlobal wheat prices are forecast to fall 5% through 2004/05 in response to a recoveryin production, in particular from Europe, Russia, India and the Ukraine. However, dryconditions in Canada, the US and here in Australia suggest a higher than usual levelof uncertainty. ABARE is forecasting this year’s world wheat production to be thesecond highest on record at 599 million tonnes. Global wheat consumption isexpected to rise by 15 million tonnes largely due to an increase in the demand forfeed wheat. Wheat used for food purposes is forecast to rise by less than 1% as thedownward trend in per person consumption of wheat continues as the consumption ofhigher protein foods and meat rises.

Early season rainfall in northern NSW and southern Queensland was adequate andwheat plantings in these areas are expected to have increased. At the time of thereport, WA was nearing the completion of the cropping programmes while SA had alate start with heavy rainfalls over the Queens Birthday weekend. However, thesoutheast corner of NSW and Victoria is still awaiting decent rainfalls. Wheatproduction is already expected to fall 7% from the record 2004/04 harvest and thecontinuing dry conditions in the southeast increase the probability of a larger fall.

Coarse grainsWorld consumption of coarse grains is expected to hold in 2004/05 but an increase inworld production will place downwards pressure on prices. Favourable seasonalconditions and relatively high prices are expected to lead to an increase in productionfrom Europe, USA, China and Argentina. For Australia's main coarse grain export,barley, world prices are expected to fall by around 6% in 2004/05 in response to higherproduction, in particular from Europe and the Ukraine. China is Australia's principlemalting barley market and growth in this market has slowed reflecting the maturing ofthe market and a shift to malt substitutes such as corn and rice.

The area sown to coarse grains in Australia is forecast to fall in 2004/05 as plantingare reduced in the southeast. A general lack of early rainfall in this region will seesome growers switch to cereals at the expense of canola and some pulses. The lack ofsubsoil moisture in southern and central NSW, the Mallee and the Eyre Peninsularwill also reduce the potential for crops sown in these regions.

Page 13: Regional Report June2004 - Westpac · Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort

Regional Australia, Economic Report

13

Regional industries: agribusiness

Westpac-NFF Farm Commodities IndexIn AUD and USD 1994/95 = 100 monthly averages

60

70

80

90

100

110

120

130

140

Jun-84 Jun-87 Jun-90 Jun-93 Jun-96 Jun-99 Jun-02

index

60

70

80

90

100

110

120

130

140index

AUD USD

source: Bloomberg, Westpac

70

80

90

100

110120

130

140

150

160170

1980-81 1984-85 1988-89 1992-93 1996-97 2000-01 2004-05

US$/tonne

0

5

10

15

20

25

30

35

40%

stocks to consumption ratio (rhs)world price (lhs)

ABARE forecasts

source: ABARE

Low stocks support coarse grain prices

100

150

200

250

1979-80 1983-84 1987-88 1991-92 1995-96 1999-00 2003-04 2007-08

USD/t

10

15

20

25

30

35

40stocks to use ratio

stocks (rhs) price (lhs)

ABARE forecasts

source: ABARE

Wheat prices boosted by low stock levels

0

20

40

60

80

100

120

2000-01 2001-02 2002-03 2003-04 2004-05

Mt

-2

0

2

4

6

8

10production (lhs) stocks (lhs) net trade (rhs)

source: ABARE

(import less exports) Mt

China has become a net wheat importer

World corn and barley prices

160

210

260

310

360

410

460

510

560

610

Dec-94 Apr-96 Jul-97 Nov-98 Mar-00 Jul-01 Nov-02 Mar-04

US$/t

60

70

80

90

100

110

120

130

140

150US¢/bl

corn (lhs) barley (rhs)

source: Factset

Chart 2.Chart 1.

Chart 3. Chart 4.

Chart 6.Chart 5.

Westpac NFF Farm Commodities Index

Percentage change overJun-04 1 month 6 months 12 months

Wheat (USc/bu) 364 -5.1 -5.1 12.6Wool (AUDc/kg) 873 4.0 -0.4 -13.4Beef (AUD$/kg) 3.40 5.7 7.9 11.7Dairy (USD/t) 2100 5.6 13.5 26.3Sugar (USc/lb) 7.45 7.1 19.0 14.6Barley (CAD/t) 150 -6.1 7.9 15.7Cotton (USc/lb) 54.6 -11.6 -24.0 -2.4Canola (CAD/t) 375 -3.5 1.7 9.7

USD Index 94/95 = 100 95.6 -0.6 -2.8 7.7

AUD/USD US cents 0.694 -1.6 -6.1 4.4AUD Index 94/95 = 100 102.4 1.1 3.5 3.1a) Monthly averagesb) Data source is Bloomberg, USDA EDA FAS

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

Page 14: Regional Report June2004 - Westpac · Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort

Regional Australia, Economic Report

Regional industries: agribusiness

Global plantings to increaseand improved seasonalconditions for oilseeds.

Australian productionexpected to fall.

Cotton prices are forecast tofall as production rises.

Australian cotton productionmakes a partial recoveryfrom the drought.

Dry weather conditions havebeen a boost for sugar prices.

A small rise in Australiansugar production.

Wool prices held down by asubstitution to synthetics.

14

OilseedsDue to an increase in plantings and return to average seasonal conditions in the majorproducing regions, world production of oil seeds is expected to rise 13% in 2004/05.With the growth in demand expected to slow, particularly from the US, Japan, China andIndia, the indicator soybean price is expected to fall more than 10%.

Australian production is expected to fall as low soil moisture and lack of autumnrainfall has constrained planting opportunities in Victoria, SA and NSW. However, therehas been an offset from increased plantings in northern NSW but even average seasonalconditions here will still see total production down around 10% on last year’s crop.

CottonCotton prices look set to ease in 2004/05 with the world raw indicator price for cottonforecast to fall 10%. A return of average seasonal conditions and increased plantingand yields in China, Indian and Pakistan are expected to be the main drivers of asignificant increase in global production. China is now a major consumer of rawcotton, accounting for 25% of the world cotton trade in 2003/04 due to strong growthin demand for cotton products in both domestic and export markets. However, theresulting decline in Chinese imports due to rising domestic production should resultin a 8% decline in world trade and a more than 10% rise in world stocks.

Australian production is set to rise in 2004/05 following good rainfall in Queensland andparts of northern NSW, which has increased water levels in key storage areas. The areaunder cotton may rise 50% in 2004/05 but this is still down almost 20% on the averagearea planted in the five years prior the drought.

SugarDuring 2003/04, dry weather conditions caused production problems in Thailand andIndia. This has been a recent fillip for sugar prices, taking them back up to US8cents/lb. For 2004/05, despite the return of normal seasonal conditions in India, ongoinginsect infestations and problems with cane farmer payments suggest Indian caneproduction should rise only modestly. Brazil will provide a partial offset with its cropexpected to rise by up to 10%. And despite the recent spike in oil prices, ethanolproduction in Brazil is expected to rise slowly relative to sugar production. As such, theworld indicator price of sugar is forecast to average around US8 cents/lb in 2004/05.

Conditions for the current Australian sugar harvest are a little better than last year withcane cut for crushing forecast to rise 1 million tonnes. Assuming average yields, rawsugar production should rise by around 5% in 2004/05 to around 5 million tonnes.Farmers in several key areas are facing ongoing challenges. In far north Qld there iswaterlogging due to unusually heavy rainfall while the lack of sunshine is affecting theproduction of sucrose. In contrast, dry conditions plague Mackay cane growers.

Wool and sheepWool prices continued to decline over the past year, despite lower wool supplies, due tolower demand as processors shift to cheaper synthetics. A positive for wool has been thedepreciation of the Australian dollar since February, which has seen wool prices fallmore than 10% in US dollar terms there by increasing the competitiveness of woolrelative to synthetics. In addition, the recent spike in oil prices has resulted in highersynthetic prices. Nonetheless, with wool production forecast to rise by around 5% in2004/05 the eastern market indicator is expected to fall by around 5%.

Page 15: Regional Report June2004 - Westpac · Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort

Regional Australia, Economic Report

Regional industries: agribusiness

15

0

1000

2000

3000

4000

south QLD and north NSW other NSW

GL

0

1000

2000

3000

4000Jul-03

Jun-04

full capacity

source: ABARE

GL

Water storage in key cotton regions

0

5

10

15

20

25

30

35

1970-71 1976-77 1982-83 1988-89 1994-95 2000-01 2006-07

Usc/lb

0

10

20

30

40

50

60

70

80Mt

closing stocks (rhs)world price (lhs)

ABARE forecastssource: ABARE

Stocks continue to suppress sugar prices

-6

-4

-2

0

2

4

6

8

10

Jun-84 Jun-88 Jun-92 Jun-96 Jun-00 Jun-04

% ann

-80-60-40-20020406080100120140% ann

OECD leading index (leading 5 mnths lhs)wool price in USD (rhs)

source: Factset, Bloomberg

Global demand will be supportive of wool

400

600

800

1000

1200

1400

1600

1980 1984 1988 1992 1996 2000 2004

AU¢/kg

0

200

400

600

800

1000ktstocks (rhs)eastern market indicator (lhs)

source: ABARE

Drought accelerates rundown of wool stocks

30

40

50

60

70

80

90

100

110

1980-81 1984-85 1988-89 1992-93 1996-97 2000-01 2004-05

Usc/lb

25

30

35

40

45

50

55

60%

stocks to consumption ratio (rhs)world price (lhs)

forecasts

source: ABARE

Cotton prices rising as stocks dwindleWorld canola prices

150

200

250

300

350

400

Dec-94 Apr-96 Jul-97 Nov-98 Mar-00 Jul-01 Nov-02 Mar-04

US$/t

150

200

250

300

350

400US$/t

canola

source: Factset

Chart 2.Chart 1.

Chart 3. Chart 4.

Chart 5. Chart 6.

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

Page 16: Regional Report June2004 - Westpac · Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort

Regional Australia, Economic Report

Regional industries: agribusinessFlock rebuilding will constrainthe production of sheep meat.

Development in the USremain vital for Australianbeef prices.

Herd rebuild will limit growthin Australian beef exports.

Demand and dry conditions inAustralasia has beensupportive of dairy prices.

Australian milk prices will besupported by strong worldprices and weaker AUD.

16

Uncertainties surrounding the timing and extent of rainfall in the drought affectedareas will be the key factor driving Australia's sheep meat production in the short-term. The most likely avenue for flock rebuilding is the retention of sheep fromslaughter and as a result, mutton production is expected to fall by 18%. Providedseasonal conditions improve in winter and spring, lambing rates should be slightlyhigher in 2004/05 underpinning growth in lamb exports.

Beef and vealDevelopments in the US, the second largest export market for our beef, have played animportant role in determining Australian prices. The impact of the embargoesfollowing the discovery of single case of BSE may be extended following the USDAannouncement of a second positive screening result for BSE in June. This resulted inan increase in demand, and rising prices, for imported beef. Robust demand isexpected to continue in 2004/05 and lead to further US imports of manufacturing beef.

Australian exports to the US are estimated to have increased in 2003/04 but ourability to significantly increase beef exports is constrained by the drought-inducedreduction in the cattle herd. Even with a return to average seasonal conditions, beefturnoff in 2004/05 will be limited as graziers rebuild their herds. In Japan and Korea,the embargoes on US beef have increased demand of Australian beef and resulted ina significant rise in exports to both countries and a rise in the number of Australiancattle placed into feedlots to meet this demand.

If the embargoes on US cattle are lifted by the end of October 2004, then increasedsupplies in our major export markets will translate into lower prices. A depreciation ofthe Australian dollar will provided some offset but if the lifting of the embargoes arerealised, then Australian saleyard prices should be down slightly by the end of 2004.

DairyStronger global demand and dry conditions in Australia and New Zealand saw theworld spot price for dairy products rise significantly in 2003/04. Cheese prices havebeen given a boost from strong demand, particularly from Japan and Europe, whilestronger demand from Russia and the Middle East have been the main drivers ofstronger butter prices. With world dairy supplies expected to grow in 2004/05, pricesare expected to ease through the year. New Zealand is expected to be the main sourceof this increase in production due to improved seasonal conditions.

The farm gate price for Australian milk is estimated to have fallen 1.5% in 2003/04.For 2004/05, a combination of higher global prices and a weaker Australian dollarshould see milk prices rise by more than 2% to around 27 cents per litre. Australianmilk production fell during the drought only to fall a further 3% in the ten months toApril 2004 as the drought continued to impact on water supplies and feed quality. Animprovement in seasonal conditions and a small increase in cow numbers shouldresult in a 2% rise in Australian milk production in 2004/05. However, continuing dryconditions in the southeast put such a forecast at risk.

Page 17: Regional Report June2004 - Westpac · Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort

Regional Australia, Economic Report

Regional industries: agribusiness

17

Chart 2.Chart 1.

Chart 3. Chart 4.

Chart 5. Chart 6.

Beef prices and turnoff

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Jul-96 Jul-97 Jul-98 Jul-99 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04

'000

500

550

600

650

700

750AUDkgnumber of beef slaughters (rhs)eastern young indicator (lhs)

source: ABS, Bloomberg

Australian and US import beef prices

707580859095

100105110115120

Nov-96 May-98 Nov-99 May-01 Nov-02 May-04

USD/kg

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8US¢/lb

US import price of frozen Aus & NZ beef (lhs)eastern young cattle indicator (rhs)

source: Bloomberg, Factset

US cattle prices back from the BSE slump

60

65

70

75

80

85

90

95

Oct-97 Feb-99 Jun-00 Oct-01 Feb-03 Jun-04

US¢/kg

707580859095100105110115120US¢/lb

US live cattle futures (lhs)US Aust & NZ frozen beef import prices (rhs)

source: Bloomberg, Factset

Australian milk prices

0

10

20

30

40

50

60

1965-66 1973-74 1981-82 1989-90 1997-98 2005-06

cents/L

0

10

20

30

40

50

60cents/L

manufacturing milk

market milk

average milk price

ABARE forecast

since industry deregulation, market and manufacturing prices are not reported separately

source: ABARE

1000

1200

1400

1600

1800

2000

2200

2400

Apr-93 Apr-95 Apr-97 Apr-99 Apr-01 Apr-03

$/tonne

1500

2000

2500

3000

3500

4000

4500$/tonne

skim milk powder USD (lhs)

skim milk powder AUD (rhs)

source: ABARE

Global milk prices remain a positive Weaker AUD a small boost for milk prices

5

10

15

20

25

30

35

1960-61 1968-69 1976-77 1984-85 1992-93 2000-01

$/t

0

500

1000

1500

2000

2500

3000

3500

4000cents/L

average milk price ¢/L

export skim milk prices

ABARE and WBC forecast

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

Page 18: Regional Report June2004 - Westpac · Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort

Regional Australia, Economic Report

Regional industries: energy and minerals

The peaking of global growthin 2004 will also see apeaking in commodity prices.

Crude oil remains sensitiveto supply disruptions.

Coal prices have risen asdemand growth hasoutstripped supply.

Growth in Chinese demandwill eat into China’s coalexports.

China has an insatiableappetite for steel.

18

Energy and minerals backgroundPrices for all our major mineral and energy commodities are expected to remainrobust, if not rise, in 2004 as demand rises with stronger global industrial activity.However, in 2005 prices are set to fall modestly as producers respond to higher pricesand ramp up production and world growth slows. There will still, however, be a fewout performers, such as coal and nickel, due to the limited availability of additionalsupply. Chinese growth will also slow and this will also help to turn down the heat oncommodity prices. Export earnings from mineral and energy are forecast to risesignificantly in 2004/05 as a result of increased volumes shipped, stronger worldprices and a weaker Australian dollar.

Crude oilOil prices have seen a strong increase to above US$40 a barrel. This price surge can beattributed to several factors including strong global demand, low OECD stocks, OPEC'sproduction policies and geopolictical concerns in the Middle East. Followingwidespread concern that high oil prices would inhibit world growth, OPEC announcedan increase in its production quota by 2 million barrels a day from July 1, with apossible further 0.5 million barrels a day by August. However, output is already close tothe increased quota and there is very little spare capacity in most OPEC membernations. Saudi Arabia and the United Arab Emirates, where there is spare capacity, haveannounced they will increase output by around a million barrels a day. It this is realised,it will place some downward pressure on prices to around US$35 a barrel in 2005. Allof which, naturally, is contingent on no disruptions to Middle East oil supplies.

CoalStrong global demand, especially from Asia, combined with supply constraints lead tosignificant increases in coal prices in 2004. China's growing consumption of coal willcontinue to influence the world markets by reducing Chinese coal available for export.

Thermal coal (steaming) consumption is expected to grow strongly in 2004. As worldgrowth slows in 2005, so will energy demand. Asia remains the key growth regionaccounting for 70% of the growth in total trade. Japan has been a key source with theclosure of some nuclear power plants and the limited availability of LNG. Europeandemand for coal also continues to rise but in 2005 this will be constrained by a recoveryin hydroelectric and nuclear electricity. Any growth in world thermal coal trade isconstrained by limited spare infrastructure capacity in Australia and South Africa.

The demand for metallurgical (coking) coal is expected to grow more than 5% in2004 due to higher steel production in Asia and the Russian Federation. China willcontinue to play a significant role as its expanding steel industry means China will nolonger be an exporter of hard coking coal.

Iron ore & steelStronger world growth in 2004 is expected to see a significant increase in global steelproduction. China will continue to play a significant role in global steel and ironmarkets as they continue to ramp up production. Notwithstanding China's continuingincrease in demand associated with development, steel demand growth is forecast toslow in 2005 as the growth in industrial production is also forecast to moderate. Ithas been growing Chinese demand for iron ore that has underpinned the significantrise in Australian export volumes and the weaker Australian dollar will will helpboost iron ore export returns in 2004/05.

Page 19: Regional Report June2004 - Westpac · Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort

Regional Australia, Economic Report

Regional industries: energy and minerals

19

The AUD & commodity prices

50

60

70

80

90

100

110

Jun-90 Jun-93 Jun-96 Jun-99 Jun-02 Jun-05

USD

0.40

0.50

0.60

0.70

0.80

0.90index

AUD/USD (rhs)

Westpac commodities index

forecast

Source: Westpac Economics, Factset, Bloomberg

10

15

20

25

30

35

40

45

Apr-83 Jun-87 Sep-91 Nov-95 Feb-00 Apr-04

USD/bbl

10

15

20

25

30

35

40

45USD/bbl

west texas intermediate

Source: Factset

Oil prices remain high

20

25

30

35

40

45

50

55

60

1989 1991 1993 1995 1997 1999 2001 2003

USD/t

20

25

30

35

40

45

50

55

60USD/t

thermal coking

forecastSource: ABARE & Westpac Economics

Coal export prices improve in 2004

20

22

24

26

28

30

32

34

36

38

1978 1983 1987 1991 1995 1999 2003

USD/t

20

22

24

26

28

30

32

34

36

38USD/t

Source: ABARE & Westpac Economics

Iron ore prices also strengthen in 2004

World growth climbs higher for now

0

1

2

3

4

5

6

1976 1980 1984 1988 1992 1996 2000 2004

% ann

0

1

2

3

4

5

6% ann

long run average

Source: IMF, Westpac Economics

Chart 2.Chart 1.

Chart 3. Chart 4.

Chart 5. Chart 6.

Australian energy & mineral exportsOil

12%

Coal23%

Iron ore and steel13%

Base metals16%

Metal ores14%

Other petroleum products

12%

Gold10%

Source: ABARE

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

Page 20: Regional Report June2004 - Westpac · Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort

Regional Australia, Economic Report

Regional industries: base metals and tourism

Nickel prices we boosted byspeculative trading in 2003.

Production growth hascapped the rise in Aluminiumprices.

Copper prices boosted byrising demand and fallingstocks.

The weaker US dollar hasbeen a boon for gold prices.

Australians are travellingoverseas again.

20

Base metalsA strong rise in demand, only a modest rise in supplies and a decline in stocks, led to asignificant rise in nickel prices in 2003. This was further boosted by an element ofspeculative buying activity and the building of a strategic stockpile in China.Speculative activity appears to have moderated following concerns about lower growthrates in China and future rises in global interest rates. However, since bottoming inMay, nickel prices have again strengthened as demand remains very robust anyadditional supply remains limited. Supply, or the lack there of, remains a key story in2004 as the growth in refined nickel output is constrained by the current high rates ofcapacity utilisation so any increase will come from incremental production increasesfrom existing facilities. This lack of excess capacity reflects a six year period of underinvestment into nickel processing due to relatively low nickel prices.

Aluminium prices rose at a more modest pace than other base metals as strongerdemand was mostly offset by rising production. As a result, aluminium stocks fell onlymodestly and prices rose only modestly. Softer world growth, and a moderation inChinese demand in 2004/05, will see a softening in aluminium demand and thus alsoprices. China has been a growing player in aluminium production but there are a numberof reason to think that the growth in Chinese production will moderate: a lack of reliableChinese alumina supply has driven smelters onto the global spot market pushing upprices and manufacturing costs; the sharp increase in Chinese economic activity hasresulted in a shortage of electricity to major aluminium producers; and, the Chinesegovernment has placed restrictions on further investment in this industry.

Copper prices rose rapidly in the early part of 2004 as strong global demand, fallingstocks, supply disruptions and speculative buying activity. Prices have since moderatedas expectations shifted to softer growth in 2005, recent measures were implemented inChina to slow investment and growth, and expectations built for higher interest rates inthe US. With copper demand forecast to slow in 2004/05 and mine supply to graduallyincrease, prices are forecast to ease slightly over the period to the end of 2005.

GoldThe significant decline in the US dollar has been a major contributing factor to themarked increase in gold prices. This relationship has, however, become less strong asdespite a weak US dollar, gold prices declined between early April and mid-May asmarkets lifted expectations for rate rises in the US. Higher interest rates enhance theattractiveness of interest bearing securities relative to gold thus putting gold pricesunder downwards pressure. Increased global uncertainty, given gold's traditional roleas a "safe haven", remains a positive for gold, as does the recent renewal of the 1999central banks agreement to limit sales of reserve gold.

TourismWith foreign tourists determining destinations partly on relative price, the strongerAustralian dollar compared with recent years has been a constraint to the number offoreign visitors to our shores. It also reduces average tourist spend and encouragesAustralians to travel abroad so the negative impact is compounded. So far this year,tourism arrivals are up 30% in the year to May. However, this is a base affect from sucha poor 2003 with no growth so far this year and levels still well off the 2000 Olympicpeak. Meanwhile, outbound tourism rebounded a solid 7% so far this year to be upmore than 50% in the year to April. This means the net tourist position has deterioratedby around 40,000 visitors over the last 12 months and is unlikely to improve anytimesoon with the Australian dollar forecast to hold around US70¢ to the end of 2004.

Page 21: Regional Report June2004 - Westpac · Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort

Regional Australia, Economic Report

Regional industries: base metals and tourism

21

1000

1500

2000

2500

3000

3500

Jun-96 Jun-98 Jun-00 Jun-02 Jun-04

USD/t

0

200

400

600

800

1000

1200copper stocks - LME (rhs) copper US/t (lhs)

'000 tonnes

Source: Factset

Copper prices jump as stocks shrink

0

200

400

600

8001000

1200

1400

1600

1800

Jun-96 Jun-98 Jun-00 Jun-02 Jun-04

USD/t

01002003004005006007008009001000

zinc stocks - LME (rhs)

zinc US/t (lhs)

'000 tonnesSource: Factset

Even zinc prices have started to improve

250

270

290

310

330

350

370

390

410

430

Jul-94 Jul-96 Jul-98 Jul-00 Jul-02 Jul-04

USD/oz

0.8

0.9

1.0

1.1

1.2

1.3

1.4USD/EUR

gold (lhs)usd/eur (rhs)

Source: Factset

Gold prices remain solid International departures catching arrivals

100

150

200

250

300

350

400

450

500

Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03

'000

100

150

200

250

300

350

400

450

500'000

departures

arrivals

pilot'sstrike

bicentennial

Asiancrisis

9/11

Source: ABSSydney Olympics

1000

1100

1200

1300

1400

1500

1600

1700

1800

Jun-96 Jun-98 Jun-00 Jun-02 Jun-04

USD/t

0200400600800100012001400160018002000

aluminium stocks - LME (rhs) aluminium US/t (lhs)'000 tonnes

Source: Factset

Aluminium prices improve despite high stocksChart 2.Chart 1.

Chart 3. Chart 4.

Chart 5. Chart 6.

3000

5000

7000

9000

11000

13000

15000

17000

Jun-96 Jun-98 Jun-00 Jun-02 Jun-04

USD/t

0

10

20

30

40

50

60

70

80nickel stocks - LME (rhs)

nickel US/t (lhs)

'000 tonnesSource: Factset

Nickel prices sour

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

Page 22: Regional Report June2004 - Westpac · Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort

Regional Australia, Economic Report

Regional dwelling approvals

22

Qld regional approvals off their highs

0

1

2

3

May-86 May-89 May-92 May-95 May-98 May-01 May-04

'000

0

1

2

3'000

Brisbane regional QldSource: ABS

Victoria still on a strong trend

0

1

2

3

4

May-86 May-89 May-92 May-95 May-98 May-01 May-04

'000

0

1

2

3

4'000

Melbourne Vic regions

Source: ABS

WA approvals holding the highs

0.0

0.5

1.0

1.5

2.0

May-86 May-89 May-92 May-95 May-98 May-01 May-04

'000

0.0

0.5

1.0

1.5

2.0'000

Perth regions

Source: ABS

Regional SA performing well

0.0

0.2

0.4

0.6

0.8

May-86 May-89 May-92 May-95 May-98 May-01 May-04

'000

0.0

0.2

0.4

0.6

0.8'000

Adelaide regionsSource: ABS

Dwelling approvals gravitate towards ‘trend”

0

1

2

3

4

May-86 May-89 May-92 May-95 May-98 May-01 May-04

'000

0

1

2

3

4'000

Sydney regions

Source: ABS

Chart 2.Chart 1.

Chart 3. Chart 4.

Chart 5. Chart 6.

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

Dwelling approvals prove resilient in regions

2

4

6

8

10

12

May-86 May-89 May-92 May-95 May-98 May-01 May-04

'000

2

4

6

8

10

12'000

capital cities regions

Source: ABS

Page 23: Regional Report June2004 - Westpac · Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort

Regional Australia, Economic Report

Corporate directory

Westpac economics

SydneyLevel 5, 255 Elizabeth StreetSydney NSW 2000Telephone (61-2) 9284 8372Facsimile (61-2) 9284 9363

Bill EvansGlobal Head of Economics

Andrew HanlanSenior Economist

Justin McCarthySenior Economist

Huw McKaySenior International Economist

Justin SmirkSenior Economist

Westpac regional banking

MelbourneLevel 12, 360 Collins StreetMelbourne VIC 3000Telephone (61-3) 9608 5792Facsimile (61-3) 9608 3824

Jamie RitchieNational Manager Regional Banking

John CashmoreRegional ExecutiveNorthern VictoriaTelephone (61-3) 5820 2553

Colin ClarkRegional ExecutiveSouthern VictoriaTelephone (61-8) 9565 8465

Barry RuddyRegional ExecutiveInland NSWTelephone (61-2) 6393 4501

Steve HannanRegional ExecutiveNorthern NSWTelephone (61-2) 6584 2856

Peter WillshireRegional ExecutiveNorthern Australia (NT & Nth QLD)Telephone (61-7) 4722 8279

Rod KellyRegional ExecutiveCentral & Southern QLDTelephone (61-7) 4688 6063

Jay WatsonRegional ExecutiveWestern Australia RegionalTelephone (61-8) 9426 2525