China iron ore drive delivers $9bn boost

Surging iron ore prices fuelled by high demand from China would deliver a $9bn boost to economic growth and $1.2bn in increased revenue.

Josh Frydenberg is shadowed by Mathias Cormann on his way to a press conference at Parliament House on Thursday. Picture: Getty Images

Surging iron ore prices fuelled by high demand from China would deliver a $9bn boost to economic growth and $1.2bn in increased revenue and is on track to drive an even bigger windfall if high prices are maintained to June 30.

Updated commodities forecasts released by Josh Frydenberg on Thursday predict iron ore spot prices would decline to $US55 a tonne by the end of the December quarter, despite commanding almost $110 a tonne this week.

Treasury estimates for metallurgical and thermal coal prices, which have fallen by about a quarter since January because of lower global demand and Chinese coal import restrictions, have been reduced to $US110 and $US54 a tonne.

Finance Minister Mathias Cormann said the government had adopted a “prudent” position on iron ore prices. “We have maintained cautious and conservative assumptions when it comes to iron ore. It’s well known there can be volatility when it comes to iron ore prices. So we continue to make sure we protect the stability of our budget settings in that context,” Senator Cormann said.

The mid-year economic fiscal outlook released in December had predicted iron ore prices would reduce to $US55 a tonne by the end of the June quarter. That forecast has now been projected for the end of December.

Senator Cormann said the resources sector had been “incredibly important” in underpinning the strength of the economy through the COVID-19 pandemic.

“One of the early decisions our government made was to keep the resources sector operating through this crisis. There’s no question that much of the resilience of our economy through this period has been underpinned by the ongoing strong performance of the resources sector,” he said.

The budget update expects mining sector investment to jump by 9.5 per cent in 2020-21, compared with a 12.5 per cent reduction in overall business investment.

The government’s economic and fiscal update expects investment in large iron ore projects would “continue in order to sustain productive capacity and maintain large capital stocks accumulated over the investment boom … Iron ore prices have remained resilient to date as the impact of falling steel production outside China has been largely offset by strong demand from Chinese steel producers and supply disruptions in Brazil.

“However, there is uncertainty about the supply and demand outlook and the prudent assumption for the iron ore spot price has been retained,” the update said.

The economic update said lower global coal prices were “likely to result in some reduced coal production” and predicts mining exports to increase by 3 per cent in 2020-21, up from 0.5 per cent in the previous financial year.

The Treasurer said mining investment was a “bright spot” in the economy, with iron ore prices being driven by high demand from China and supply constraints in Brazil. Mr Frydenberg said the government remained committed to working with states on deregulation and would continue providing support for mining businesses to bring forward investment.

As well as reforming the Environment Protection and Biodiversity Conservation Act to help fast-track approvals for major mining projects, the government is preparing a major investment package ahead of the October 6 budget.