It's now a daily occurrence and for the
Federal Government it's constant bad news that's likely to get worse.
For sixth consecutive session, the spot price
for iron ore has fallen - this time to US$49 a tonne.
With every fall, it's another hit to Joe
Hockey's shaky Budget which has been relying on tax revenue from iron ore
exports.
Source: Thomson Reuters |
This time last year, when the spot price was
US$119 a tonne, the Treasurer was factoring in a fall to around US$100 on
expectations that the big miners who had been feeding a massive appetite from
China would continue to provide sustenance for Treasury coffers.
But today at US$49 a tonne, the price
has more than halved to the lowest level since the iron ore benchmark began in
2008,
Deloitte Access Economics now estimates that
the plunge could strip $3 billion from the 2015/2016 budget, even after a
revision in the midyear update just before Christmas.
So now with corporate tax receipts down as
the price hits the bottom of a wild cycle, it's getting even tougher for Mr
Hockey to get the budget back into balance.
Source: Thomson Reuters |
What is now a resounding correction is all
part of the big economic picture in China, where annualised economic growth is
slowing to around seven percent.
The reality check for the world's second
biggest economy means less manufacturing, less construction and therefore lower
demand for steel.
As a result, the normally big stockpiles of
iron ore aren't being topped up as frequently.
At the same time, savvy operators of Chinese
steel mills are playing a waiting game on the expectation that the iron ore
price is likely to fall even more - so why buy now?
Steel mills are also under pressure from
Chinese regulators to tighten up environmental standards and are looking at ways
to cut costs as they reduce emissions.
In addition to hurting the Federal Budget,
the correction is also continuing bad news for Australia's iron ore exporters.
On top of yesterday's falls, there was more
selling in early trade with BHP Billiton down 0.5 percent, Rio Tinto 1 percent
and Fortescue Metals 2.7 percent weaker.
Last week, Fortescue's outspoken chairman
Andrew Forrest suggested the big miners should cooperate to cap iron ore
production to keep the price high.
That earned a warning from the chairman ofthe ACCC Rod Sims that even the suggestion of cartel activity might risk not
only civil but criminal penalties.
In a report issued yesterday, Deutsche
Bank is forecasting that prices may drop below US$40 as weaker currencies and
lower energy prices eased producers' costs.
Bloomberg has quoted a Standard Chartered
report which warns that tumbling prices risk mine closures and job losses at
sites across the globe, including in China.
As prices tumble, some higher-cost mines are
closing or suspending output. More than 210 million tons of capacity has been
cut, with additional closures to come, according to Morgan Stanley, which
reduced its price forecasts last month.