Iron Ore Gives Budget Boost
The iron ore market has been volatile due to fluctuations in both supply and demand. On the supply-side, Vale’s dam collapse in Brazil and subsequent court proceedings has led to the closure of Brazil’s largest iron ore mine, this combined with BHP’s revised output volumes due to weather issues earlier this year has constricted supply. In addition, prices have been exacerbated by China demand for iron ore represented by the growth in Chinese steel output to 1.8%, with institutions such as Credit Suisse and Standards and Poors’ increasing their pricing forecasts.
The commodity was reaching a five-year high of $US108 per tonne on Tuesday. This was largely due to aforementioned Brazilian owner of the Brucutu iron ore mine saying it would not reopen as fast as he expected it to. With supply problems in Brazil, demand for iron ore grows in China’s steel sector. Nicki Hutley, Deloitte’s Access Economics partner has noted that if the prices were to remain at this level for the next 13 months, it could deliver $4 billion of revenues to the federal government in the coming months.
The budget predicts an average iron ore price of $US88 per tonne for fiscal year 2020 but will revert back to $US55 per tonne by March, early in 2020. Analysts from Goldman Sachs however predict that the iron ore price will stay around $US91 per tonne in 2019, $US80 per tonne in 2020 and then $US71 per tonne in 2021. Analyst Paul Young has reiterated that Rio may be able to pay out $US9.3 billion in shareholder returns over 2019, as Rio’s Australian shares traded above $105, for the first time since 2008, in the mining boom. These forecasts will definitely equate to a strong economic growth in the mining regions of the country which will see it grow until 2021.
This upward shift in Australian iron ore demand started in early February as the mine closures in Brazil pushed buyers to secure supply through Australian mining companies. As a result, nominal GDP is predicted to be $2.5 billion higher than initially forecasted in 2018-19 and $3.5 billion higher in 2019-20. Investor sentiment was shown in the ASX as Fortescue Metals Group – a large exporter of iron ore in Australia – saw its shares rise from $3.84 in January to $8.45, along with the rise of Rio Tinto shares. BHP shares last month also eclipsed $40 for the very first time since 2011 and Mt Gibson Iron shares trading above $1.20 for the first time since 2012.
Trade war concerns
The US-China trade war has raised significant concerns around the globe, but has not reportedly impacted the demand for iron ore. The projection for the low Australian dollar gives a major boost to Australia’s export earnings. This growth will eventually plateau as higher prices and export volumes will drop once the Brazilian mine is open again. The Brazilian mine is still on halt, pending further announcements.
Iron ore exports were disrupted by a tropical cyclone that struck the main mining harbours in Western Australia. With Brazil’s mine issue and Australia’s cyclone hit, the global supply of iron ore was reduced as the two iron ore powerhouses were unable to beat consumer demands. Australia’s production swiftly picked up and now aim to be the global supplier for the next 2-3 years while the opportunity presents itself. Ultimately, iron ore markets will be unaffected by the trade war with the exception of small hiccups if US President Donald Trump decides to increase tariffs on counterpart, China. The trade war has caused the Chinese Yuan to fall and along with this, the RBA aims to cut interest rates in the next quarter, resulting in the Australian dollar increasing as it currently sits at $4.79 Yuan thus maximising profits of iron ore trade as the Australian dollar will have higher value.
With the tariffs in place, the Chinese government will look to ramp up positive stimulus which includes building more infrastructure in order to compensate for the slowdown. China has falling iron ore inventories and their demand for robust steel for their infrastructure plans in the country is further fuelling the price jump.
Coalition gain from iron ore boom
Federal revenues will have an increase of $4 billion if the current sale price persists. The Coalition government will stick around until 2022 which means they will benefit heavily China’s increasing demand of iron ore.
Australia is currently in a prime position to reap all the benefits from the current global outlook in the form of iron ore. Looking ahead, the Australian economy can hope for a budget surplus in years to come, allowing the government to increase expenditure within the country.
By Rizwan Sayeed
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