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Australian Treasury Stays Conservative On Iron Ore

Treasury is still expecting the iron ore price to hit $55 per tonnes in the next year

SYDNEY — The budget remains extremely conservative when it comes to forecasting the iron ore price, predicting levels around a quarter of the going rate in global commodity markets.

The iron ore price has struck record highs of over AU$ 256.27 ($200) per tonnes in recent weeks, well above the AU$ 70.47 ($55) per tonnes Treasury last year forecast the red metal falling to by the September quarter 2021.

It means the budget bottom line will be much improved through the addition of billions of dollars of additional revenue.

This has partly helped reduce the 2020/21 budget deficit to AU$ 161 billion ($125.6 billion) from AU$ 197.7 billion ($154.29 billion) as previously forecast.

A general view of the Department of Treasury in Canberra. (Lukas Coch/AAP Image)

However, Treasury isn’t budging from its AU$ 70.47 ($55) per tonnes level, only that it will now be met in the March quarter of 2022.

“Of course, if iron ore stays at elevated levels above AU$205.03 ($160) until that period … it will add an extra AU$12 billion ($9.36 billion) to the budget,” Treasurer Josh Frydenberg said.

“So there is significant upside to the iron ore price. Treasury will always be conservative when it comes to the iron ore price.”

The budget papers note the iron ore price has remained elevated “at around AU$205.03 ($160) per tonnes” since mid-December 2020 due to strong Chinese demand and unresolved supply disruptions in Brazil, another major iron ore exporter.

Frydenberg had earlier tweeted “Budget 2021 is all about Securing Australia’s Recovery. It’s the Morrison Govt’s plan to create 250,000 new jobs, with tax relief for families, & record spending on infrastructure & skills. We’re focused on getting more people into work & setting Australia up for the future.”

The iron ore price has struck record highs over $200 per tonne in recent weeks. (Kim Christian/AAP Image)

“Treasury’s industry liaison suggests that in the near term, global iron ore supply is not expected to recover rapidly and the sustained demand for steel production is expected to drive iron ore demand,” the budget papers say.

“There are upside risks to the outlook for commodity prices as industry consultation suggests that iron ore prices could remain elevated for an extended period of time.”

As per the Geoscience department’s report, the total Australian Ore Reserves of iron ore reported in compliance with the Joint Ore Reserves Committee Code were estimated to be 23, 106 Metric tonnes in 2018.

It also notes that metallurgical coal prices have been volatile recently, while thermal coal prices have been supported by the continued recovery in global economic activity, the cold winter in East Asia over early 2021 and recent weather-related supply disruptions in Australia.

“While Chinese restrictions have affected the price of some types of Australian coal, so far, most coal exports have been able to be re-directed to alternative markets,” the budget papers say.

However, consultation with the market and industry participants has highlighted that there is elevated uncertainty in the coal market, in particular around the duration of the Chinese restrictions on Australian coal, as well as around global environmental policies.

(Edited by Vaibhav Vishwanath Pawar and Praveen Pramod Tewari)