Boosted iron ore
prices due to anxious markets are likely to help federal budget’s bottom line,
Deloitte says
Australia’s
losses from trade tensions with China are being
offset by rising iron ore prices, according to new analysis, which also
predicts the Morrison government will announce a smaller budget deficit than
originally forecast.
Deloitte
Access Economics said Chinese government moves against wine, beef, barley,
lobsters and thermal coal have cost Australia money “but we’ve more than made
that up in overall terms thanks to iron ore – and the taxman will be a
considerable beneficiary of that”.
Chris
Richardson, a Deloitte partner and leading economist, said spot prices had
risen by US$18 a tonne since 30 November amid fears that China may consider
taking some action against Australian iron ore, resulting in markets “nervously
bidding up prices”.
“This
‘fear tax’ isn’t the only thing driving up prices – markets are also worried
that heavy rain may constrict supply out of Brazil, while very low interest
rates and a falling US dollar are pumping up pricing too,” Richardson said in a
statement.
He said
the increased iron ore prices would help drive an improvement in the federal
budget bottom line when the government delivers an update this week.
For a
range of factors, including the better than assumed
performance of the Australian economy and lower spending on
jobkeeper wage subsidies, Deloitte is tipping the 2020-21 deficit may be $3bn
less than the $213.7bn level that was forecast in the October budget.
The
improvement in the bottom line may rise to $15bn by 2023-24, according to the
analysis.
Deloitte
points out that tariffs and other trade actions can hurt both countries,
potentially costing Chinese families at the same time as targeting Australian
businesses.
As a
result, it says, rising domestic thermal coal prices in China “mean that it may
be unlikely to do much more than sabre-rattling on Australian coal”.
“Where
China knows it is most at risk is iron ore,” Richardson said.
“China
is the world’s key customer, but Australia is the world’s key supplier. That’s
why analysts have said China wouldn’t act on Australian iron ore, as it would
cost them lots. However, markets are still worried that China may do something.”
The
Australian government has raised increasing alarm at the series of actions
taken by Chinese authorities and has been urging exporters to diversify to
other markets.
A
second report released on Monday suggests Vietnam provides
significant opportunities for Australian exports, including beef, live cattle,
grains like wheat and barley, cotton, horticulture and processed foods.
Two-way
trade reached about $15.5bn last year but Australian companies are not yet
taking full advantage of existing and emerging market opportunities, according
to the report by the Australian APEC Study Centre at RMIT University. The
centre is directed by the former Labor trade minister Craig Emerson.
The
report says both Australia and Vietnam are seeking to reduce their economic
over-reliance on China as a dominant trading partner and are committed to
supporting the continuing role of the US in the region as a balancing factor.
While
Vietnam welcomes overseas business and its economy is maturing fast, it cannot
replicate the sheer scale of the China market, the report concedes.
The
report also notes the relocation of factories from China to Vietnam due to
China-US tensions “is likely to continue in the wake of Covid-19 with the
reorganisation of supply chains”. There are also opportunities for growing
exports of services.
The
report was commissioned by Asia Society Australia and financially supported by
the Victorian government and its findings are likely to find favour in
Canberra.
Last
week the federal agriculture minister, David Littleproud, told Guardian Australia
there was frustration among producers and growers about the
China standoff, but he hoped to see enrichment of links with Vietnam next year.
Littleproud
said he also hoped next year brought the finalisation of new trade agreements
with the EU and the UK, along with pursuit of opportunities with India even if
that did not lead to a formal free trade agreement.
The
Guardian