Aug. 31 (Bloomberg) -- Australia's trade deficit narrowed more than expected in July as China's demand for commodity exports saw it surpass Japan as the nation's largest trading partner.

The trade shortfall shrank to A$756 million ($617 million) from a revised A$1.74 billion in June as exports of aluminum, zinc and wheat increased, the Bureau of Statistics said in Sydney today. The median estimate of 26 economists surveyed by Bloomberg News was for A$1 billion. Exports rose 2 percent and imports fell 3 percent.

Chinese demand may help extend Australia's 16-year economic expansion. Trade with mainland China has doubled in three years, driving up prices of raw materials such as iron ore, zinc and coal. BHP Billiton Ltd. and Zinifex Ltd. are among local miners reporting record profits.

``This is clearly a red-letter day for Australia,'' said Craig James, chief equities economist at Commonwealth Bank of Australia in Sydney. ``For the past 36 years, Japan has retained the mantle of Australia's largest trading partner. Now that mantle is held by mainland China.''

The trade is not all one-way for Australia, with China now the biggest supplier of imports to Australia. Japan is still the biggest buyer of Australia's exports.

China-Australia trade totaled A$50.5 billion in the year to July, up 20.2 percent on a year earlier. Japan-Australia trade totaled A$49.7 billion.

``Japan still has top spot as the destination for Australian exports at A$32.4 billion in the year to July, while China is the No.1 supplier of imports to Australia at A$27.5 billion,'' James said.

Drought, Storms

The Australian dollar rose to 82.30 U.S. cents at 4:45 p.m. in Sydney from 81.66 cents immediately before the trade report and 81.48 cents late in Asia yesterday.

``Exports will improve in coming months as resource shipments increase and farm output recovers from the drought,'' said Joshua Williamson, senior economist at TD Securities Ltd. in Sydney. ``That will help maintain strong economic growth over the rest of 2007.''

Australia's overseas shipments rebounded in July from transport disruptions caused by storms the previous month. Coal shipments fell 4 percent in June, nickel exports plunged 45 percent and zinc exports declined 24 percent.

Storms in June drove a ship ashore and disrupted coal loading at Newcastle harbor for two weeks, worsening delays due to inadequate rail and terminal capacity. Newcastle, north of Sydney, is the world's largest coal-export port.

Wheat, Wool

Australia's total exports climbed to A$18.36 billion in July. Farm shipments, such as meat, sugar, wheat and wool, advanced 3 percent. Shipments of non-rural goods, which include minerals, rose 3 percent.

Exports account for 20 percent of Australia's economy.

``International demand for Australian wool is solid,'' said Steve Noa, director of Harvest Wool Australia Pty., which exports 10,000 metric tons of wool a year to China, Europe and South Korea. Still, ``the drought has depleted herds, so that has reduced supply.''

Total imports dropped to A$19.12 billion in July, today's report showed. Imports of capital goods, which include business machinery and vehicles, slumped 10 percent. Imports of intermediate goods, which include fuel, fell 3 percent.

Australia's trade balance has been in deficit for five years as exporters struggle to overcome congestion at mines, ports and railways and as drought curbed crop production. The shortfall peaked at A$2.4 billion in November 2004.

Ports, Railways

Port and rail bottlenecks in New South Wales and Queensland states have hindered miners from meeting orders. The congestion is costing companies such as Xstrata Plc, BHP Billiton and Rio Tinto Group about A$2 billion in lost sales, according to the Queensland Resources Council, which represents mining companies.

Export growth may accelerate as mining companies complete expansion projects and rain encourages farmers to resume planting after a drought ravaged crops last year.

BHP Billiton said this month it has as much as $50 billion of expansion projects to feed rising demand in Asia and Europe.

The Melbourne-based company posted an eighth consecutive record profit, saying a five-year commodities rally will be sustained. The world's biggest miner's sales to China jumped 47 percent in the second half, accounting for 20 percent of its total.

Zinifex, the world's third-largest zinc producer, reported record profit on higher prices and forecast sustained demand for metals. Net income rose 24 percent to A$1.33 billion in the 12 months ended June 30, the company said Aug. 27.

Exports may also pick up as rain encourages farmers to resume planting. Australia's government forecasts wheat production will more than double from last year's drought-hit harvest because of higher rainfall in grain-growing regions.

``We are hoping the drought is behind us, with recent rains, as that means we will get the grains for feeding the cattle,'' said Richard Rains, chief executive officer of Sanger Australia Pty. The company exports A$350 million of beef each year, 90 percent of it to Japan, the U.S. and Korea.

To contact the reporters for this story: Victoria Batchelor in Sydney at vbatchelor@bloomberg.net; Gemma Daley in Canberra at gdaley@bloomberg.net.

Last Updated: August 31, 2007 02:48 EDT