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Australia budget assumes iron ore tumbling to $55/t by March

Australia’s budget forecast released on Tuesday assumes the country’s top export earner iron ore would tumble to $55 a tonne by March after this week skyrocketing to all-time highs surpassing $200 a tonne, a conservative estimate which masks the underlying strength in its fiscal position despite an ongoing trade dispute with China.

The assumed plunge in iron ore price would come three quarters later than was assumed in October.

Australia’s budget deficit is expected to blow out to a record high of A$161 billion in the current year-ending June 2021, Tuesday’s budget showed, though rising iron ore prices allow more room to keep the fiscal tap open to aid the recovery from the coronavirus recession.

The government’s predictions show Australia’s nominal economic output could be around A$11.6 billion lower than forecast in 2020/21 if iron ore fell to $55 immediately.

The hit on nominal gross domestic product would be A$38.1 billion in 2021/22, resulting in a decrease in tax receipts of around A$600 million in 2020-21 and A$8.3 billion the following year.

By contrast, if prices were to remain elevated until March 2022, it would be a A$1.1 billion windfall in 2020/21 and close to A$50 billion boost the following year, the budget assumptions show.

“It’s a conservative forecast,” Australian Treasurer Josh Frydenberg told reporters in Canberra.

“If iron ore stayed at an elevated level as opposed to coming down that would be extra dollars.”

Iron ore prices have surged since mid-December, due to strong Chinese demand and supply disruptions in major producer Brazil.

The Treasury’s industry liaison suggests global iron ore supply is unlikely to recover rapidly and the sustained demand for steel production is expected to drive iron ore demand.

The government noted the “limited impact” on Australia’s economic recovery from escalating trade tensions with top trading partner China, saying many goods targeted by the restrictions were successfully re-directed to other markets.

Chinese restrictions have hurt the price of some types of Australian coal though most coal exports have been found alternative customers, the government said.

Trade relations between Australia and China have worsened after Prime Minister Scott Morrison angered Beijing by calling for a global inquiry into the origins of the coronavirus.

Australia also blocked some investments by Chinese firms in infrastructure and technology sectors, citing security risks.
Source: Reuters (Reporting by Swati Pandey)

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