Sebastian Vettel is expected to challenge Lewis Hamilton for the title this year
Vettel finished 0.547 seconds behind Mercedes' Lewis Hamilton on the leaderboard after the second free practice session in Melbourne.
The German was the closest contender to Hamilton, who also posted the fastest time in the morning, and it was a marked improvement on free practice 1 when his Ferrari was the sixth-quickest car on track.
Vettel was behind his team-mate Kimi Raikkonen and admitted that the set-up of his car wasn't quite right.
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"The balance wasn't yet where I want it to be, so I think we can still do a decent step forward," said Vettel.
"This morning was not so good, we had some small issues that caught me out.
"But the team is doing well. I think we have a lot of things that we can improve.
"The balance is not so good yet, but I'm sure we can work on that overnight.
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"We had some small troubles this morning that cost us some lap time, so it took a bit longer to get into the groove.
"The car still doesn't yet feel as good as it should and it can."
Vettel and Raikkonen peppered the top of the time-sheets during pre-season testing and were able to log a huge number of laps with only Mercedes managing more.
Their performances sparked hope among F1 fans that the 2017 season might not be a race for second place behind Mercedes, who are gunning for a fourth consecutive world title.
However, Vettel has been talking the Brackley team up as favourites and is keen to play down his own chances despite the rampant excitement surrounding Ferrari's prospects.
"People from outside make up their own opinion, no matter what you tell them," Vettel added.
"Obviously, we've been very happy in testing, the times looked good, but it doesn't mean anything.
"You come here and that's when it matters, we were realistic about that.
"Today was OK, the car feels good and it hasn't changed much, it was only two weeks ago that we got out of the car.
"We can still improve."