Ore fall a big dent to budget

The dramatic fall in the price of iron ore since the start of March could punch a $1.4 billion hole in the state’s finances in the next financial year.

With an overnight price of $US63.20 per tonne this morning, the steelmaking commodity is trading at a level around $US18/t lower than at the end of March, when it was $US81.78/t.

See the BNiQ iron ore price chart. 

According to the Department of Treasury, every $US1/t fall in the iron ore price reduces revenue by about $76 million per year.

That makes the drop of the past few weeks worth around $1.4 billion annually to the state’s coffers if prices stay at current levels, compared with the March figure.

With only a few months remaining in the current financial year, the fall is unlikely to have as significant an impact on the state budget’s final outcome for 2016-17, but it will affect the numbers for years going forward.

When the 2016-17 budget was brought down last May, the state had predicted an operating deficit of $3.9 billion, predicated on an iron ore price of around $US48/t.

The jump in the commodity’s price that followed, peaking at around $US95/t in February of this year, was a major bonus, and one that had not entirely been factored into more recent economic statements.

For example, the state government’s most up to date estimates were released just two weeks ago.

In that analysis, Treasury had projected an iron ore price average of $US73.70/t for the 2016-17 financial year, up from $US70.30/t in the pre-election statement released in February.

The price was expected to fall across the forward estimates to be around $US63.70/t by the 2020 financial year.

Even at that level, it was about $15 higher than the consensus estimate in financial markets for 2020.

But the price has already fallen well below those most recent projections, presenting a problem for the new government’s debt reduction plans.

In the recent state election campaign, Labor had flagged that 50 per cent of all iron ore royalties would be used towards a debt reduction fund when the price hit a level above $US85/t and the state’s GST relativity simultaneously exceeded 65 per cent.

Neither is forecast to happen this decade.

To put all that in context, the May federal budget forecast an iron ore price of $US55/t in 2016-17.

China driven

In a note to investors today, the Commonwealth Bank of Australia said the recent fall in the iron ore price (around $US3.10/t last night) had been driven by views that supply of the commodity would outpace demand in the year ahead.

“Demand expectations in China have been pared back as fears grow that policymakers will start targeting China’s property sector,” the note said.

March quarter GDP data for China was also softer, the Bank said, with the Asian nation’s economy growing 1.3 per cent in the three-month period, below a 1.6 per cent growth forecast.