Thursday, April 2, 2015

Iron ore falls to US$49 a tonne - more bad news for Joe Hockey's budget

It's now a daily occurrence and for the Federal Government it's constant bad news that's likely to get worse.

For sixth consecutive session, the spot price for iron ore has fallen  - this time to US$49 a tonne.

With every fall, it's another hit to Joe Hockey's shaky Budget which has been relying on tax revenue from iron ore exports.

Source: Thomson Reuters

This time last year, when the spot price was US$119 a tonne, the Treasurer was factoring in a fall to around US$100 on expectations that the big miners who had been feeding a massive appetite from China would continue to provide sustenance for Treasury coffers.

But today at US$49 a tonne,  the price has more than halved to the lowest level since the iron ore benchmark began in 2008,

Deloitte Access Economics now estimates that the plunge could strip $3 billion from the 2015/2016 budget, even after a revision in the midyear update just before Christmas.

So now with corporate tax receipts down as the price hits the bottom of a wild cycle, it's getting even tougher for Mr Hockey to get the budget back into balance.

Source: Thomson Reuters

What is now a resounding correction is all part of the big economic picture in China, where annualised economic growth is slowing to around seven percent.

The reality check for the world's second biggest economy means less manufacturing, less construction and therefore lower demand for steel.

As a result, the normally big stockpiles of iron ore aren't being topped up as frequently.

At the same time, savvy operators of Chinese steel mills are playing a waiting game on the expectation that the iron ore price is likely to fall even more - so why buy now?

Steel mills are also under pressure from Chinese regulators to tighten up environmental standards and are looking at ways to cut costs as they reduce emissions.

In addition to hurting the Federal Budget, the correction is also continuing bad news for Australia's iron ore exporters.

On top of yesterday's falls, there was more selling in early trade with BHP Billiton down 0.5 percent, Rio Tinto 1 percent and Fortescue Metals 2.7 percent weaker.

Last week, Fortescue's outspoken chairman Andrew Forrest suggested the big miners should cooperate to cap iron ore production to keep the price high.

That earned a warning from the chairman ofthe ACCC Rod Sims that even the suggestion of cartel activity might risk not only civil but criminal penalties.

In a report issued yesterday, Deutsche Bank is forecasting that prices may drop below US$40 as weaker currencies and lower energy prices eased producers' costs.

Bloomberg has quoted a Standard Chartered report which warns that tumbling prices risk mine closures and job losses at sites across the globe, including in China.

As prices tumble, some higher-cost mines are closing or suspending output. More than 210 million tons of capacity has been cut, with additional closures to come, according to Morgan Stanley, which reduced its price forecasts last month.

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