Critical minerals weigh, iron ore assumption hiked

The state government has made an upward revision to its long-term iron ore price forecast, as lower-than-forecast critical mineral royalties highlight the volatility challenges facing the economy.

The state’s forecast operating surplus slipped by $561 million for 2023-24 in today’s state budget release against the mid-year review and is now expected to come in at $3.2 billion.

That was despite royalty income estimated at $11.2 billion in the current financial year, driven by iron ore royalties which increased $771 million from mid-year review expectations to $9.8 billion.

Iron ore’s enduring strength offset weakness in critical minerals – particularly lithium and nickel – where price weakness as a result of global supply gluts impacted state revenue.

Royalties from commodities outside of iron ore were projected to fall almost 30 per cent year on year.

Lithium royalties revised a further $355 million downward relative to the mid-year review, which already factored in a significant downturn in the price of the battery metal.

Lithium royalties fell from over $1 billion in 2022-23 to an expected mark of $422 million in 2023-24. The government expects lithium royalties of $378 million in 2024-25 before a slight uptick in the outward years.  

Its position as the second-highest royalty generator for the state, a mantle it assumed from gold in 2022-23, was short lived, with gold royalties projected at $533 million in 2023-24.

The state’s market share of the global lithium market is expected to drop 10 per cent between now and 2028 as a result of new international supply, to 29 per cent of overall product.

The challenges facing the nickel sector were less pronounced in terms of budget impact, but forecasts enduring pain for those producing nickel product.

The budget predicts the nickel price will climb back above $US20,000 per tonne by June 2028, having hovered around $US17,000/t in recent months at a level that led to the closure of several projects in Western Australia and cast doubt on the future of BHP’s Nickel West assets.

Royalty revenue was again included as a domestic risk facing the state’s bottom line, with enduring reliance on royalty revenue a concern for treasury officials.

“Many of WA’s key commodity prices have been very volatile over recent months, including iron ore, nickel and lithium,” the budget papers said.

“This has seen several investment projects delayed and has coincided with a potential peak in mining employment.

“If commodity price volatility continues, this could have ramifications for the state’s economic activity and revenue collections.”

Assumption climbing

The state government has achieved a string of surpluses in recent years off the back of enduring strength in iron ore balanced against conservative price forecasting.

The past three budgets has used a price forecast of $US66/t as the expected iron ore price for outward years, a measure that has been increased in the 2024-25 state budget.

A new iron ore price assumption of $US71/t has been set for the forward years, while the coming financial year assumes an iron ore price of $US75/t as the price assumption from the mid-year review reverts to the long-term average.

The state’s budgetary revenue jumps around $94 million for every dollar the iron ore price averages above the forecast outlined in the budget.

It drops the same amount for every dollar below the forecast.

The price of iron ore dropped around 30 per cent between the beginning of January and the cut off for the budget in April, to around $US100/t, and has subsequently rebounded.

Treasurer Rita Saffioti highlighted the importance of diversifying the state’s revenue base in handing down her first budget.