There
is no way to dig next week's budget out of its COVID-19 recession black hole,
but Australia's iron ore miners have done their best to prop up one source of Government
revenue.
Key points:
·
Iron ore prices have risen by about 30 per cent
since the start of the year
·
Vivek Dhar from CBA says the Government's price
forecasts were conservative
·
Prices are expected to moderate once Brazil
ramps up production again, after a series of disruptions
It is
not so much that they are digging up more of Western Australia's rich red dirt,
but that their predominantly Chinese customers are paying a lot more for it.
Commonwealth
Bank commodities analyst Vivek Dhar has been watching iron ore prices soar
during the pandemic.
"It's
been elevated since the beginning of the year, but it really peaked a few weeks
ago at $US130 a tonne," he said.
"Since
then we have seen some pullback, and now we're tracking around that $US115,
$US120 a tonne level."
But even
that level is well above the most recent Federal Government projections from
the July Economic and Fiscal Outlook, or JEFU.
"If
you look at FY21, the average price forecast that the Government's estimated is
about $US63 [a tonne], we're looking at about $US100," Mr Vhar said.
Cathryn
Lee from Deloitte Access Economics used to work in Treasury doing forecasts for
the Government, and she said the budget benefit could be even bigger.
"If
iron ore prices were to remain at this elevated level, you could expect to see
a boost to Government tax receipts of anywhere between $5 to $15 billion in
2021," she said.
Deloitte's
latest forecast is for a budget deficit of $198.5 billion in the current financial year, a slight improvement on its
previous forecast, thanks to the contribution from iron ore.
"That
being said, we do expect that the iron ore price will moderate over the
remainder of this year and into next year, and that mainly reflects the
expectation that supply will be stronger from Brazil."
Australia's iron ore
boost from China and Brazil
The
pandemic has created a series of unfortunate events that have been good for the
fortunes of Australia's largest export.
As
Australia and other countries entered recession, China had already started to
claw its way out.
Mr
Dhar said very strong Chinese demand as it sought to boost its economic
recovery from the pandemic had been the key driver of the prices rises.
"We've
seen China come out of COVID-19 implementing significant stimulus, particularly
infrastructure, which accounts for about 20-25 per cent of final steel
consumption," he said.
However,
Australia has also received a free kick from its main rival in iron ore
exporting, Brazil, which has had to contend with several disasters that have
severely disrupted its output.
"Part
of that is COVID-19 related, bad weather, but some of the issues lingering from
last year when we saw a fatal dam collapse have also been a driver this
year," Mr Dhar said.
Australian
miners took advantage of the supply hole, exporting a record 82 million tonnes
in June, according to the quarterly resources and energy report from the
Department of Industry, Science, Energy and Resources.
Combined
with high prices, that saw iron ore become the first commodity to earn
Australia more than $100 billion in a single year, bringing in $102 billion in
the 2019-20 financial year.
The
Government expects export volumes to hold up around current levels, but it is
forecasting a fall in the earnings from those exports to around $80 billion in
2021-22, as prices recede.
While export volumes are expected to hold up,
the value of exports is tipped to fall as prices decline.(Source: ABS,
Department Of Industry, Science, Energy And Resources)
Vivek
Dhar agrees, citing both demand and supply factors.
"China's
iron ore demand impulse, in our view, is likely to hold up at least for the
remainder of 2020 but we expect at some point in 2021, perhaps mid-2021, for
that demand impulse to start fading," he said.
"We're
seeing a noticeable improvement in Brazil's iron ore exports in the second half
of this year and so we expect that recovery to also play into lower iron ore
prices over the next 12 months."
Not all commodities are
booming
While
iron ore and gold have both been near or at record Australian dollar prices
this year, not all of Australia's key resources exports have seen the same
benefits from the pandemic.
"Prices
from other commodities haven't been as rosy — we've seen falls in coking coal,
thermal coal and LNG," noted Ms Lee.
Mr
Dhar said that is because Australia's markets for other key exports, such as
coal and iron ore, are more diversified and most have not fared as well as
China during the pandemic.
"Whereas
[in] iron ore China accounts for about 70 per cent of seaborne demand, when it
comes to coking coal China only accounts for about 22 per cent," he said.
Japan,
India, Europe and South Korea are the major markets for Australia's exports of
the other key steel-making ingredient, and all have been hit harder by COVID-19
and the global recession it triggered.
Coking
coal prices fell to a low in mid-August of $US105 a tonne but have since
recovered about 30-35 per cent from that trough, Mr Dhar said, adding that
thermal coal, which is used for power generation, has also recovered somewhat
from its low point but not as much.
Nonetheless,
with Australia dominating a lucrative iron ore export market and also set to become
the world's biggest gold producer at a time when prices for the precious metal
are around record levels, it looks like taxes on commodities will be an
unexpected net gain for the Commonwealth and Western Australian budgets.
"Commodities
should contribute better than expected in FY20-21," Mr Dhar said.
A
small gold and iron lining to Treasury coffers suffering from the most painful
recession in 90 years.
Source:
abcnews