Sinking oil prices, wobbly start for China – impacts on red meat?
21 January 2016
Amidst news of oil prices slumping to their lowest levels since 2003 (with Brent Oil below 30US$ a barrel) and the Chinese stock market having an extremely sluggish start to 2016, what could this mean for Australian red meat?
Weak oil prices:
The low oil prices, which are reportedly unlikely to recover anytime soon, will create the greatest uncertainty on demand from net oil exporting regions, like the Middle East and Russia. The Middle East was in fact Australia’s fifth largest destination for red meat (beef, mutton, lamb and goat) exports in 2015.
While this alone causes some doubt in the market, adding further complexity in the Middle East for beef particularly will be the increased competition from Brazil with their recently reinstated access to Saudi Arabia – although Brazilian beef is yet to enter the market.
It should be noted that due to the region traditionally being a sheepmeat consumer, there may be stronger resistance for that product, compared to beef.
Weak Chinese stockmarket:
For China, Australia’s third largest destination for red meat in 2015, the struggling stockmarket may not actually be the best barometer of Chinese consumer confidence over the coming year or their capacity to pay for luxury items, including red meat.
On the one hand, it may have a negative impact on consumer confidence if such volatility is sustained as people may feel it is a symptom of a broader malaise, particularly in conjunction with falling interest rates, the yuan devaluation and slowing GDP growth.
On the other hand, Chinese consumers have comparatively little exposure to the stock market, having more of a savings than an investment approach with their money. Plus, it is a comparatively small, immature and highly restricted market, so it does not ‘reflect’ the economic system as much as those in western countries,
Furthermore, the Chinese economy is still experiencing a high growth phase, with estimated 6.9% GDP growth in 2015, and interestingly, the low oil prices previously mentioned may also be of benefit to China, as it is one of the world’s largest oil importers.
Impacts on Australian red meat:
While the economic health of each region is one measure of demand, other factors that also influence will be the availability of Australian product, competition from other proteins and countries and trade restrictions on chilled beef to China.
Nevertheless, the proportion of Australian beef, lamb, mutton and goat production exposed to China and the Middle East varies considerably, as illustrated in chart 1. In turn, this means the impact on each species will also vary, if there is any resistance or subdued demand.
Mutton currently has the greatest contact with the two regions, with the combined volume traded to the two accounting for 44% of production in 2015. The other primary mutton export destination is the US, which could mean a larger proportion of production will be headed that way in 2016.
Lamb has the second highest level of exposure, yet to a significantly less extent, as such a large proportion of Australian lamb production (45%) is consumed domestically. In 2015, lamb exports to the Middle East and China accounted for 21% of production.
While there was considerable growth for Australian beef and veal exports to China and the Middle East in recent years, only 11% of production was shipped to these two markets in 2015. Beef also has the benefit of large volumes still destined to Japan, Korea, and the US and consumed in the domestic market.
Ultimately, in two regions where there is some economic uncertainty and simultaneously where competition is heating up, the result may be a greater proportion of exports diverted to other markets in 2016.
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