WA BUDGET: WA Treasury has revised its forecasting methodology for iron ore prices to assume that prices fall away quickly from the current inflated levels, which have provided a large boost to government coffers.
WA Treasury has revised its forecasting methodology for iron ore prices to assume that prices fall away quickly from the current inflated levels, which have provided a large boost to government coffers.
The benchmark (Fe 62 per cent) iron ore price has risen as high as $US94.20 per tonne this year reflecting the impact of lower shipments from Brazil (due to tailings dam collapses) and the Pilbara (due to Cyclone Veronica).
Treasurer Ben Wyatt told a media briefing that iron ore prices “clearly will not be around that level for long”.
The budget forecasts assume that iron ore prices will dip slightly in the current financial year, to an average of $US73.50/t before dropping to the mid $US60s level.
These assumptions are crucial as iron ore royalties contributed $5.4 billion to government coffers in 2018-19, about 85 per cent of all mining royalties.
Total royalty income in 2018-19 was up 19 per cent to $6.2 billion.
Royalty income is projected to increase by a modest 2.4 per cent in the current financial year to $6.4 billion, helped by increases in lithium, gold and iron ore royalties.
It will then decline in 2020-21 and beyond, to $5.5 billion by 2022-23, as the iron ore price returns to the low to mid-$US60s per tonne and gold royalties decline.
One commodity with a growing contribution is lithium - its royalties are budgeted to increase strongly over the forward estimates, from $94 million in 2018-19 to $202 million in 2022-23, as the volume of production rises.
Treasury has forecast that Western Australian lithium concentrate export volumes will nearly quadruple over the next four years - rising from 1.2 million tonnes in 2017-18 to 1.9Mt in 2018-19, and further increase to 4.6Mt by 2022-23
Royalties from most other commodities, particularly gold, are forecast to decline primarily due to depletions at existing mines.
In Treasury’s commentary on the iron ore market, it notes that some market analysts expect the impact of supply cuts will be protracted with the affected supply returning gradually over time, which would support the iron ore price in the medium term.
“However, there is considerable uncertainty on both the supply and demand side of the iron ore market,” Treasury stated.
“There may be capacity for other iron ore producers to offset some lost supply, with offsets most likely to come in the short-term from Chinese domestic producers.
“On the demand side, recent price increases could be reversed by a moderate fall in Chinese demand, which accounts for around 70 per cent of the seaborne market.
“Given this heightened uncertainty, it is prudent that the Budget does not assume that current high prices will remain over the medium term.
“Therefore, Treasury’s iron ore price forecasting methodology has been adjusted in this Budget to assume that the increase in price will be relatively short-lived, returning to around $US66 per tonne by 2020-21.”
Treasury’s forecasts have been derived from forward contract prices for the first six months of the current financial year before transitioning to Consensus forecast prices over six months.
Previously, such as in the Mid-year Review, it transitioned to Consensus forecasts over 18 months.
This has the effect of reducing forecast prices to $US65.60/t in 2020-21 and $US63.70/t in 2022-23.
Treasury said its forecast price was similar to the assumptions in the federal government’s budget.
