Iron ore price surge set to boost WA budget amid Brazil coronavirus crisis and Chinese demand
By James Carmody
Posted 7hhours ago, updated 2hhours ago
The rising iron ore price is expected to deliver WA higher than expected mining royalties.(Reuters: Tim Wimborne)
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The tightening grip of the coronavirus pandemic on Brazil could help Western Australia's ability to weather the economic storm created by COVID-19.
The South American nation is one of the largest exporters of iron ore, but its output has been falling at the same time that Chinese demand for the mineral, key to steel production, is returning.
The result is a price-driving scenario similar to that which saw the WA mining industry prosper in the wake of a deadly landslide in Brazil last year that forced several mines to close.
The resulting boost to iron ore royalties helped the WA Government last year post its first budget surplus in five years.
With the state now facing a much gloomier economic outlook due to the coronavirus downturn, the price of iron ore has already lifted about 30 per cent and analysts say it is approaching $US100 ($150) a tonne.
Speaking before he announced WA was headed for recession thanks to a $1.8 billion hit, Treasurer Ben Wyatt said mining royalties could be higher than expected.
"We have, other than royalties, seen a decline across all other revenue sources, and I expect when we get updated by the Commonwealth the GST pool will have shrunk as well," he said.
"That's despite the grocery growth very early on with the impact of the coronavirus.
"But there is no doubt that the strong iron ore price is providing some fiscal assistance to the state, unfortunately not offsetting the declines in other revenue sources."
The relative success in suppressing the virus in the state thus far, coupled with the decision to allow mining operations to continue, has allowed Australia to fill emerging gaps in the global market. Distance no longer a tyranny
The isolation of WA and the even greater remoteness of its mine sites has traditionally been a great burden on the local mining industry.
Regularly moving people and materials across vast distances comes at enormous expense, but distance has helped the state avoid outbreaks.
It takes just days to ship iron ore from Australia to China, compared to about 45 days from South America.(Supplied: Roy Hill)
"Our isolation used to be a major drag," industry analyst Tim Treadgold said.
"It's now turning out to be one of the biggest pluses for the industry, with very few people, long distances, not a great infection rate. Life continues on."
Australia is also geographically much closer to China than Brazil.
It takes about 45 days to ship ore from South America to China, but just 12 days from Australia. Coronavirus update: Follow all the latest news in our daily wrap.
Mr Treadgold said even if Brazil returned to its usual output, it would be a month and a half before that really took effect.
He also said any Brazilian recovery would be hard to predict due to the nature of the virus.
"Last week they were apparently up and starting to recover, but we just don't know what's going on with the virus in that country," he said.
"It's become one of the global centres of the coronavirus, and that could have a real effect on their mining industry in the second half of the year.
"Fears that this thing might be a short-run spike in prices, we'll just have to wait and see what happens in Brazil." How fast is coronavirus growing around the world?
020406080100120Days since 100th case1001k10k100k1MCumulative known casessince 100th caseAustraliaBrazilChinaIndiaJapanMexicoRussiaSwedenUSS. KoreaNZTaiwanUK This chart uses a logarithmic scale to highlight coronavirus growth rates. Read our explainer to understand what that means — and how COVID-19 cases are spreading around the world.
Mr Treadgold said there were also concerns among investors that Chinese demand for iron ore may not last, but he said falling stockpiles in the country were promising.
"The port stockpiles in China are down to less than where they were last year, so if you use stockpiles as a guide, the $US125 a tonne from last year becomes possible this year," he said. Treasurer remains cautious
Mr Wyatt said he was not counting his chickens before they had hatched and his forecasts would remain conservative.
"I've always been reluctant to make a prediction on iron ore prices, which is why the budget is always predicated on a much more conservative estimation around the price," he said.
"We'll continue to have conservative estimates around the iron ore price, but at the moment it's proving to be strong."
"It may well crack the $US100 a tonne [mark] again, but I expect anything over $US100 will be short term, just because of the nature of the volatility of these things."
Iron ore operations in the Pilbara have not been slowed by the coronavirus crisis.(AAP: Kim Christian)
Mr Wyatt said the WA industry was firing on all cylinders despite the pandemic.
"We're effectively nearly at capacity in terms of volumes we can get out of our ports," he said.
"All mining companies continue to invest in their own efficiencies, but really in respect of the major infrastructure we're effectively running at capacity, unless a mining company wanted to make significant investments to increase volume out of our ports."
The Treasurer said some miners in Europe were again contributing to global supply after local demand halted, but the scale of it paled to operations in northern WA.
"There is of course some global supply coming out of Europe because European demand has contracted as well," he said.
"In the Nordic states that produce iron ore there is now some extra supply there, but it is not the sort of capacity or volumes that you see out of the Pilbara." China still holds the key
Mr Wyatt said the fate of the iron ore price would be largely determined by the nature of Chinese efforts to get its economy back on track.
Treasurer Ben Wyatt says WA will continue with its conservative estimates of the iron ore price.(ABC News: James Carmody)
"Ultimately, what now will drive it will be the impact of the Chinese stimulus measures that they've been announcing in the last week or so," he said.
"When that flows through to a better understanding of demand we may well see another spike in that price."
Initial indications about Chinese stimulus measures showed they were less focused on infrastructure than iron ore miners would have hoped.
But it is thought that would not dramatically temper the level of steel production.
