1 Jun 2012

Falling export prices eat into NZ's purchasing power

6:09 pm on 1 June 2012

The purchasing power of New Zealand's exports earnings has had its biggest quarterly fall in nearly three years.

The terms of trade - the measure of how much imports the country can buy with its export earnings - are now 4% below the 37-year high they reached in the middle of 2011, and more falls are expected.

For the March quarter, the terms of trade fell by 2.3% - the third consecutive quarterly fall.

The latest decline came from export prices falling faster than those for imports, not helped by the high New Zealand dollar. Radio New Zealand's economics correspondent says higher currency makes imports cheaper, while depressing local currency returns for exporters.

However, imports reached their highest level ever, due to more imports of consumer goods, while plant and machinery purchases fell.

A 6% fall in prices for dairy products was the biggest contributor to the 3.8% decline in export prices in the March quarter. But the carnage was not limited to the country's biggest export earner, which is in the middle of its steepest decline in prices since 2009.

Meat exports recorded a sharp decline of 3.6% for the March quarter. And wool prices, up 70% in the previous two years, suffered their biggest quarterly fall since 2001, down 10%.

The managing director of wool exporter Segard Masurel, Peter Whiteman, says the fibre has become too expensive.

"At the very top end we've still got the wealthy customers who will always buy wool, but they're just not in numbers any more. People are going into shops with a very strict budget. These are the few who are, because the total sales are down anyway and they have to meet their price point.

"As wool started to rise substantially, then the manufacturers started to write wool out of their blend."

Mr Whiteman says Europe's problems have hammered that market, as well as hitting New Zealand's biggest market for wool, China.

"In Europe it's been big, and that's also been a problem for China, too. A lot of the knitwear - particularly for women's fashion - the early stage processing for that is in China and they're just starting to meet some headwinds in Europe for fabrics for knitwear and fashion."

Logjam for forestry exports

Prices for forestry exports fell 4% in the March quarter, as a slowdown in China hit demand for logs.

Jacob Mannothoran is the chief executive of Nelson log exporter Zindia, which sells everything it produces to India.

He says prices had been holding up, despite the slowing Indian economy, but increasing numbers of New Zealand logs previously bound for China are threatening to flood the market.

"There is one company that is exporting about four shiploads this month, as against the usual two. There's another one that's doing about six. So the problem we have is a huge influx of logs and they've also unilaterally dropped the price."

Eurozone crisis forces cutbacks

And it's not just commodities that are suffering: non-food manufactures fell 4% in the March quarter.

Caleb Yap, deputy chief executive of Whanganui safety helmet-maker and exporter, Pacific Helmets, says business has been tough for two years.

The company sells to government agencies, including fire services in Europe. But fiscal pressure and austerity measures in those countries has affected sales and the company has seen big cutbacks in orders.

Pacific Helmets is switching more sales to South America and Australia where government finances are in better shape, however, Mr Yap worries that the company could be becoming too reliant on sales to Australia as a result.