Government slashes iron ore price forecast
Federal government iron ore price projections have been cut by 20pc, casting further doubt on the budget outlook.
The Department of Industry and Science has slashed its iron ore forecast by 20 per cent in a move that casts further doubt on the federal government’s budget outlook.
The department now expects iron ore prices to average $US44.20 a tonne in 2016 and $US44.80 a tonne in 2017.
The 2016 projection is not far removed from the department’s most recent forecast of $US45 a tonne in April, but the expectation for next year is 20 per cent shy of its most recent $US56 a tonne forecast.
This also compares unfavourably to the federal government and Treasury’s $US55 a tonne forecast.
Treasury’s $US55 a tonne forecast in May’s budget represented a sharp 41 per cent upgrade on its December view of $US39 a tonne thanks to ore prices bouncing near $US70 a tonne near the end of April.
Should the latest prediction from the department of industry prove accurate, the budget deficit for 2016-17 – currently projected at $37.1 billion – would likely blow out by around $1.5bn.
“Despite the large movements in prices, the market fundamentals are broadly unchanged — demand growth is slow and the market remains well-supplied,” the Department of Industry and Science report said.
“With the expectation of weak growth in consumption and stronger growth in supply, prices are forecast to moderate over the remainder of 2016.”
The department added expectations for next year had become much more pessimistic due to marginal supply staying in the market for longer than initially anticipated.
“In 2017, iron ore prices are expected to recover more slowly than previously forecast,” the report read.
“The revision is based on the assumption that loss-making operations may continue to produce for longer than previously expected. It also factors in increased supply from India and additional cost savings reported by iron ore producers.”
The department also opted to bin its projections for 2018 to 2021, with no price forecast for those years now available. In April, the government body had tipped a recovery above $US60 a tonne by 2018.
The analysis comes a day after Standard & Poor’s warned on Australia’s credit rating, with its pessimistic view on iron ore prices listed as a key reason to doubt the nation’s capacity to meet revenue forecasts.
“S&P Global Ratings projects iron ore prices to be close to $US20 per metric tonne lower than the level assumed in the government’s budget in the remainder of calendar 2016 and in 2017, although the impact on the mining sector’s profits may be partly offset by a weaker currency,” S&P said.
Iron ore last traded at $US55.20 a tonne, although several analysts have recently warned rising supplies could force it below $US50 in the next quarter.
