Treasury is still expecting the iron ore price to hit $US55 per tonne in the next year.
Camera IconTreasury is still expecting the iron ore price to hit $US55 per tonne in the next year. Credit: AAP

Treasury stays conservative on iron ore

Colin Brinsden, AAP Economics and Business CorrespondentAAP

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The budget remains extremely conservative when it comes to forecasting the iron ore price, predicting levels around a quarter of the going rate in global commodity markets.

The iron ore price has struck record highs over $US200 per tonne in recent weeks, well above the $US55 per tonne Treasury last year forecast the red metal falling to by the September quarter 2021.

It means the budget bottom line will be much improved through the addition of billions of dollars of additional revenue.

This has partly helped reduce the 2020/21 budget deficit to $161 billion from $197.7 billion as previously forecast.

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However, Treasury isn't budging from its $US55 per tonne level, only that it will now be met in the March quarter 2022.

"Of course, if iron ore stays at elevated levels above $US160 until that period ... it will will add an extra $12 billion to the budget," Treasurer Josh Frydenberg told reporters.

"So there is significant upside to the iron ore price. Treasury will always be conservative when it comes to the iron ore price."

The budget papers note the iron ore price has remained elevated "at around $US160 per tonne" since mid-December 2020 due to strong Chinese demand and unresolved supply disruptions in Brazil, another major iron ore exporter.

"Treasury's industry liaison suggests that in the near term, global iron ore supply is not expected to recover rapidly and the sustained demand for steel production is expected to drive iron ore demand," the budget papers say.

"There are upside risks to the outlook for commodity prices as industry consultation suggests that iron ore prices could remain elevated for an extended period of time."

It also notes that metallurgical coal prices have been volatile recently, while thermal coal prices have been supported by the continued recovery in global economic activity, the cold winter in East Asia over early 2021 and recent weather-related supply disruptions in Australia.

"While Chinese restrictions have affected the price of some types of Australian coal, so far, most coal exports have been able to be re-directed to alternative markets," the budget papers say.

However, consultation with market and industry participants has highlighted that there is elevated uncertainty in the coal market, in particular around the duration of the Chinese restrictions on Australian coal, as well as around global environmental policies.