News: Australia forecasts dramatic drop in iron ore prices through 2018

SYDNEY, Jan 9 (Reuters) - Australia on Monday forecast a dramatic decline in the price of iron ore -- its most valuable export commodity -- over the next two years to well below current market prices.

The Department of Industry, Innovation and Science forecasts iron ore to average $51.60 a tonne this year and $46.70 in 2018, compared with current spot prices of around $80, double the price a year ago. The department predicted a price of $44.10 in 2016

The country's chief forecaster said the price rise is being caused by a temporary lift in Chinese steel production and run ups caused by speculative commodities trading in China that will not last.

"The rally reflects a combination of fundamental drivers and speculative trading," the department said in its latest commodities outlook paper, "However, with the likely moderation of these factors over the outlook period, the iron ore price is still forecast to decline."

The department also dropped its forecast for exports of iron ore by 2 percent to 832.2 million tonnes in fiscal 2016-17 from 851 million previously, though this is still a 5.9 percent rise year-on-year. Australia is the world's top supplier of iron ore.

December iron ore shipments to China from Australia's Port Hedland terminal hit a record 37.4 million tonnes in December, boosted as users such as BHP Billiton (BHP) and Fortescue Metals Group (FMG) ramped up production.

The price of metallurgical coal, one of the best-performing commodities last year, should rise by 59 percent on a contract basis this year to an average $182.20 a tonne in 2017, according to the department.

Contract prices for long-term supply for the March quarter 2017 were settled between Australian metallurgical coal producers and Japanese steel producers, at $285 a tonne. This marked the highest negotiated quarterly contract price in five years.

The contract price averaged $114 a tonne in 2016. Australia also lifted its average 2017 thermal coal price forecast to $74 a tonne from $63 previously, citing China’s supply side reform policies and lower output from Indonesia. Thermal coal averaged $62 a tonne in 2016.

The forecaster expects Australian crude oil and condensate output to remain steady at around 317,000 barrels per day in fiscal 2016-17.

Liquefied natural gas production is forecast to increase to 104.5 billion cubic meters (Bcm) in 2016-17 from 81.2 million Bcm the previous year.