Budget forecasts iron ore back to $US60 a tonne

Conservative treasury estimates on iron ore and coal suggest corporate tax take will stay far higher than treasury forecasts.

The Albanese government’s commodity price outlook remains well below market expectations despite “modest” changes to forecasting methods to reflect the strong iron ore and coal prices that helped Jim Chalmers deliver the first budget surplus in 15 years.

The Treasurer’s surplus was partly delivered on the back of iron ore and coal prices that stayed far higher than Treasury forecasts, which were heavily criticised in the wake of the last budget in October 2022.

When Dr Chalmers delivered his first budget in October, iron ore was trading at about $US91 a tonne, excluding shipping costs, and Treasury forecast prices to almost halve to $US55 a tonne by the end of March 2023.

Instead, a sharp recovery in the Chinese economy after the relaxation of Covid-19 restrictions and lockdowns helped drive up iron ore prices to more than $US140 a tonne in the March quarter and, despite sharp falls since then, ­analysts still expect the price of the steelmaking commodity to average around $US100 a tonne in 2023.

Similarly, in the March quarter thermal coal prices averaged more than four times the $US60 a tonne forecast by treasury, at $US260 a tonne, and coking coal prices averaged $US342 a tonne, more than 2.5 times the $US130 a tonne level forecast in October.

Treasury has traditionally taken a conservative approach to commodity price forecasting, assuming the price of iron ore and coal will return to its long-term averages within a set period – that was six months at the October 2022 budget.

After last year’s wildly inaccurate forecasts, Treasury has now “modestly” lifted its long-term price assumption for each commodity, and assumes prices will fall to long-term levels within a year rather than six months. Tuesday’s budget now tips iron ore prices to fall to an average $US60 a tonne by March 2023, rather than $US55 a tonne. Thermal coal prices are expected to soften to $US70 a tonne, $US10 above earlier forecasts, with coking coal tipped to level off at $US140, also $US10 ahead of previous expectations.

Conservative treasury estimates on iron ore and coal suggest corporate tax take will stay far higher than treasury forecasts. Picture: Wang Zhao/AFP

“The long-term price levels for iron ore, metallurgical coal, thermal coal and LNG spot prices have also been increased modestly to take account of recent developments in commodity markets, inflation in the mining industry and updated assessments of long-run supply and demand fundamentals. The commodity price assumptions remain conservative and at the lower range of market forecasts,” the budget papers say.

“Treasury has extended the period over which prices return to their long-term anchors to better reflect ongoing price pressures associated with market disruptions. This adjustment period remains highly conservative relative to market views, to account for the downside risk of sharp price corrections, such as the 50 per cent fall in thermal coal ­prices in the first two months of 2023.”

Even the latest forecasts are well beneath consensus analyst estimates.

Originally published as Budget forecasts iron ore back to $US60 a tonne