The government thinking thermal will hold while the spot price...

The government thinking thermal will hold

while the spot price of thermal coal will remain higher than expected in the mid-year economic forecast, at $US93 a tonne.

Federal budget: Iron ore, coal prices forecast to ease

The budget papers warn that volatile global oil prices will weigh on LNG exports

• GLENDA KORPORAAL
• The Australian
• 12:00AM May 9, 2018
• • Share on Facebook
  • Share on Twitter
  • Share on email
  • Share more...

The federal government is expecting the prices for key commodities including iron ore and coal to ease over the next few years from their recent highs.

Higher-than-expected commodity prices helped underwrite a rosier-than-expected fiscal position in last night’s budget.

But the budget’s forecasts are built on the expectation of falling terms of trade over the next four years, which, it says, are “broadly in line with the view that the prices of some key commodities will not be maintained at recently elevated levels”.

The budget is expecting Australia’s terms of trade, which rose by 14.4 per cent last financial year, to increase by another 1.5 per cent in the current financial year to June, before falling by 5.25 per cent in 2018-19 and by another 2.25 per cent in 2019-20.

The budget’s economic forecasts assume the spot price for iron ore will come in at about $US55 a tonne over the next four years — lower than the $US67 a tonne average over the March quarter.

The forecasts assume the price of metallurgical coal will fall later in the year to $US120 a tonne while the spot price of thermal coal will remain higher than expected in the mid-year economic forecast, at $US93 a tonne.

The budget paper notes the prices for Australian iron ore has been affected by the changing demand by Chinese steel mills.

“Demand for high-grade supply has driven an increase in the premium paid for this iron ore, while lower-grade iron ore is attracting discounts,” it says.

“As a result, producers of high- grade iron ore are benefiting from an increase in both demand and prices for their high-grade reserves, while producers of low- grade reserves are experiencing significant price discounts.”

It says the low impurity level of Australia’s iron ore provides the country with a comparative advantage over other key global iron ore prices.

The budget papers make it clear that the outlook for the economy and the budget deficit are highly sensitive to changes in global commodity prices. If the prices of metallurgical coal were to fall immediately to $US120 a tonne, almost two quarters earlier than expected, it estimates nominal GDP would be about $600m lower than forecast in 2017-18 and $2.8bn lower in 2018-19.

This would see a $500m fall in tax receipts for 2018-19 and a $300m fall in 2019-20. Conversely, if they were to remain at their current high levels for two quarters longer than currently expected, nominal GDP would be $200m higher than expected in 2017-18 and $3.1bn higher in 2018-19.

This would result in an increase in tax receipts of $600m this financial year and $200m next financial year.

The budget papers also point out that Australia’s export revenues will become more vulnerable to the world price of oil as exports of LNG increase.

It says Australia is on track to become the world’s largest exporter of LNG over the next few years, much of it sold under long-term contracts linked to the world price of oil.

“As a result, movements in global oil prices will have a larger effect on Australia’s export prices than in the past,” it warns.

The papers note the high levels of volatility in world oil prices that plunged from more than $US100 a barrel in 2014, to a low of $US28 a barrel by early 2016.

“More recently, there has been a renewed rally in oil prices to some of the highest levels seen over three years,” it notes.

“Going forward, oil prices are expected to continue to be heavily influenced by supply responses from the US shale industry and the OPEC countries,” it says.

Further rise in the world oil prices, it adds, would see a stronger outlook for Australia’s nominal GDP as they flowed into revenue from LNG exports