wa commodities boom to roll on for years:rba

The commodities boom driving the WA economy will continue for years, the Reserve Bank has predicted, tipping prices for minerals such as iron ore will remain at historically high levels on the back of strengthening demand from China and the rest of developing Asia.

In one of its most upbeat assessments of the resources boom — which has delivered hundreds of billions of dollars into the national economy over the past four years — the Reserve used its statement on monetary policy to predict prices will stay high even as the supply of raw minerals increases.

But it also cautioned that the higher prices are now flowing back into Australia in the form of higher prices for finished goods.

The WA economy, and the budget bottom lines of State Treasurer Eric Ripper and his Federal counterpart Peter Costello, have surfed the resources boom which has over the past five years pushed up iron ore prices by 189 per cent, copper prices by 300 per cent and nickel prices by 400 per cent.

The Reserve said Mr Ripper and Mr Costello should expect the royalty and taxation bonanzas to flow for some time yet, with strong demand from Asia to continue for key resources.

“With the favourable outlook for global demand, in particular for resource-intensive growth in developing Asia, Australia’s terms of trade are likely to remain at historically high levels over the next few years,” it said.

“While there are signs of increasing global supply for some commodities in response to the run-up in prices seen in recent years, at this stage it seems unlikely to be sufficient to result in significantly lower commodity prices overall.”

The bank believes there is scope for further price rises for coal and, in a particularly important development for WA, for iron ore.

“As a low-cost supplier of iron ore to China, Australia is well positioned to take advantage of this demand and market analysts generally expect 2008-09 contract prices to also rise by around 15 per cent,” it said.

It’s not just the mining sector the Reserve believes will benefit from strong demand in coming years.

Wheat prices are up 15 per cent so far this year based on a smaller than expected northern hemisphere crop, while wool prices are up 40 per cent on a year ago.

The only soft area for commodities is in base metals which, despite falling sharply over the past three months, are still up this year.

Again, the RBA believes over the longer term, prices will remain strong for base metals such as nickel and copper.

“Futures markets continue to point to a decline in most base prices over the next couple of years, although they are expected to remain at high levels,” it said.

There is also an emerging problem from these high-priced commodities – high priced goods being imported back into Australia.

The bank said some of its business contacts had warned that the costs faced by producers, brought on by expensive commodities, were feeding through the supply chain.

SHANE WRIGHT
ECONOMICS EDITOR