iron ore coal to power on

Iron ore, coal to power on

13th December 2007, 10:15 WST



Iron ore and coal prices could soar 50 per cent next year, pumping an extra $25 billion into the national economy and underwriting a soft landing for the Perth property boom, Access Economics will say in a report today.

But it will also warn that another surge in the commodities boom will put more pressure on interest rates, making it even more important that the Rudd Government slash public spending.

In its latest outlook on the retail sector, Access said it was clear that prices for the nation’s two biggest exports, coal and iron ore, would rise at least 30 per cent and possibly 50 per cent when negotiations between major customers and producers are completed early next year.

Iron ore prices have risen nearly 190 per cent over the past four years and are tipped to rise at least 30 per cent for 2008-09.

While the US Federal Reserve cut interest rates on Tuesday by another quarter of a percentage point, amid signs of a sharply slowing American economy, Access believes there could be two more rate rises in Australia because of the strength of the Chinese economy.

Company director David Rumbens estimates the increases in prices for these and other key industrial commodities since 2003 is now injecting $87 billion a year into the Australian economy, accounting for 8 per cent of the nation’s GDP. A 50 per cent lift in iron ore and coal prices next year would take that figure to $113 billion.

He said such gains would help cushion the Perth housing market slowdown and see growth in retail spending in WA lead the rest of the nation for at least the next two years.

“WA remains at the centre of the impact of the strong global economy for Australia and it’s not over yet — the commodity boom is delivering investment, jobs and profits to the West in spades,� he said.

“The stronger-for-longer commodity cycle should spell a relatively soft landing for Perth’s property prices.�

But at the national level, Access is growing increasingly concerned about what the commodities boom may mean for interest rates and inflation.

Mr Rumbens said the previous Federal government had effectively become a post box, collecting revenue from the commodities boom and posting it to Australian consumers via income tax cuts.

With two more rate rises a good chance next year, Mr Rumbens said Mr Rudd faced major policy decisions that would require him to slash Federal Government spending.

“He inherits levers of economic management at loggerheads with each other — the Federal Budget throwing more money into the Australian economy and the Reserve Bank desperately vacuuming it back out via higher interest rates,� he said.

“That’s not a smart policy mix. And the new government needs a razor gang to do something about it ASAP before it leads to further interest rate rises.�

Spending restraint is not a problem facing the US, where the Federal Reserve cut its official rate and the discount rate it offers lenders by a quarter of a percentage point.

America’s official interest rate is now 4.25 per cent compared with Australia’s 6.75 per cent.