Australian government budgets are facing a potential $12 billion windfall this financial year as prices of iron ore and coal, the nation’s two biggest exports, continue to surge, defying expectations as steel demand holds up in China at the same time as the Asian powerhouse holds back its own coal production.
Federal tax revenue, West Australian iron ore royalties and Queensland and NSW coal royalties could rise by a combined $12bn more than the governments had budgeted for this financial year if iron ore and thermal coal prices hold at current levels and coking coal contract prices can be sustained, according to calculations by The Australian.
The boost in expectations comes on the back of a tripling in coking coal spot prices since the start of June to a five-year high of $US258.50 a tonne, a doubling of thermal coal prices since the end of June to a four-year high of $US105.80 a tonne and a 20 per cent increase in the price of iron ore, which had been expected to slide as more supply came on, to a six-month high of $US64 a tonne.
“This could be a game-changer for Australia,” HSBC’s local chief economist Paul Bloxham said.
“It’s clear, given the rise we’ve seen in both coal and iron ore prices, that the drag on (national) incomes is now in the past and that the gains have the capacity to significantly change the narrative on the Australian economy,” he said.
“Increased (national) income flows through to corporate profits; some of that gets through to wages growth and because the fiscal coffers are boosted through tax, some of that filters through to the household sector through wages growth.”
Australian government budgets are facing a potential $12 billion windfall this financial year as prices of iron ore and coal, the nation’s two biggest exports, continue to surge, defying expectations as steel demand holds up in China at the same time as the Asian powerhouse holds back its own coal production.
Federal tax revenue, West Australian iron ore royalties and Queensland and NSW coal royalties could rise by a combined $12bn more than the governments had budgeted for this financial year if iron ore and thermal coal prices hold at current levels and coking coal contract prices can be sustained, according to calculations by The Australian.
The boost in expectations comes on the back of a tripling in coking coal spot prices since the start of June to a five-year high of $US258.50 a tonne, a doubling of thermal coal prices since the end of June to a four-year high of $US105.80 a tonne and a 20 per cent increase in the price of iron ore, which had been expected to slide as more supply came on, to a six-month high of $US64 a tonne.
“This could be a game-changer for Australia,” HSBC’s local chief economist Paul Bloxham said.
“It’s clear, given the rise we’ve seen in both coal and iron ore prices, that the drag on (national) incomes is now in the past and that the gains have the capacity to significantly change the narrative on the Australian economy,” he said.
“Increased (national) income flows through to corporate profits; some of that gets through to wages growth and because the fiscal coffers are boosted through tax, some of that filters through to the household sector through wages growth.”
Any revenue surge could ease pressure on Australia’s AAA credit rating. Ratings agency Standard & Poor’s recently warned it could cut Australia’s credit rating because of a weakening federal budgetary position. Any ratings cut could have a knock-on effect for state credit ratings.
Mr Bloxham said he was surprised the Reserve Bank of Australia did not mention surging coking coal prices with its Tuesday decision to keep interest rates on hold.
“The RBA appears to be taking a (characteristically) cautious approach to not shifting the narrative until it is completely sure that the story has changed,” he said.
Even so, coking coal prices will be the biggest contributor to the budget boosts.
If coking coal can sustain quarterly contract prices of $US200 a tonne for the rest of the financial year, bringing average prices to $US186 a tonne, the federal government stands to earn an extra $5.6bn over its budget price expectation of $US91 a tonne.
This is based on production of 189 million tonnes, a 10 per cent discount to benchmark prices and a stable currency.
If thermal coal prices hold at current levels, the government faces a gain of up to $2.7bn beyond what it stood to get under its forecast price of $US52 a tonne, although a decision by Glencore, the nation’s biggest thermal coalminer, to hedge half of its global production when prices were low will probably weigh on this.
The Queensland government stands to earn an extra $1.25bn in royalties this year if thermal coal spot prices and coking coal contract prices hold firm, based on its budget assumptions that every 1 per cent gain in the average coal price adds $25 million to its budget revenue.
While spot prices of coking coal, which like iron ore is used to make steel, are broadly expected to come off, analysts are slowly conceding that markets could remain tight well into 2017.
A big part of the price spike has been due to Chinese curbs on domestic coal production to limit overcapacity, which analysts had not been expecting to last.
Deutsche Bank analysts who attended a London briefing by South32 chief Graham Kerr on Tuesday said the Perth miner had become more bullish on demand and had been surprised by the lack of a supply-side response.
“Across the Chinese mining industry, smaller operators are not easily able to access funding to restart shuttered mines, extra good quality labour is proving difficult to source and there is also resistance to ramping up too quickly in terms of safety risks,” Deutsche analysts led by Paul Young said.
“South32 expects tightness to persist in metallurgical (coking) coal well into the first quarter of 2017, if not the second quarter.”
Macquarie analysts this week raised coking and thermal coal prices but still did not expect prices to hold at current levels.
“This timeframe (for prices to fall) depends on how the Chinese government progresses restructuring and consolidating the coal industry,” Macquarie said.
“Certainly, risk appears skewed towards prices staying higher for longer.”
In May, the federal budget made a then bullish iron ore price forecast of about $US60 a tonne landed in China, or $US55 at Australian ports.
With prices about $US5 higher than that now, federal coffers are looking at an extra $1bn in tax revenue if prices hold.
Western Australia, which had a more conservative forecast of $US47.70 a tonne landed in China, also stands to see about $1bn of extra income from iron royalties if prices hold, based on assumptions it revealed in its budget in May and calculations revealed on royalties the previous year.
If thermal coal prices hold at current levels, then the NSW government stands to make $800m more than it expected, based on the state’s forecasts of $US55 a tonne.
Source: The Australian.com