Iron ore price slump hits WA state budget

Sliding iron ore prices have led to a potential A$2bn ($1.75bn) shortfall in the Western Australia (WA) state government's budget for the 2014-15 fiscal year ending 30 June 2015.

Iron ore royalties accounted for about 20pc of the state's total revenue base. The current iron ore price is about 35pc lower than the budget assumption for 2014-15, which was finalised in April in line with market expectations at the time," WA treasurer Mike Nahan said.

"This has wiped about A$2bn off the state's expected revenue in the current financial year. Moreover, under the current flawed process for distributing GST (goods and services tax) revenue among the states and territories, the impact of this won't be fully recognised in Western Australia's GST grant revenue until 2018-19," Nahan said.

The revenue deterioration of this magnitude in less than six months is unprecedented, and will significantly reduce the state's capacity to deliver a general government sector operating surplus in 2014-15, Nahan added.

"We can't control the iron ore price or the exchange rate for the Australian dollar, and that means we have to look to our day-to-day spending and determine what can sensibly and responsibly be done in response to such a large and rapid decline in revenue."

Falling iron ore prices have been largely triggered by the massive output expansion by UK-Australian producers Rio Tinto and BHP Billiton from their Pilbara mines in WA. Both firms committed this week to their expansion plans despite falling prices and weakening demand growth.

WA premier Colin Barnett criticised this strategy, which was hurting smaller iron ore producers in Australia.

"This strategy of the two major producers to flood the market and force the price down, I mean, remember who your landlord is," said Barnett, in a veiled threat about the prospect of raising royalties.

If the current market trend of increasing production and prices decline then the royalty rate could become an issue, Barnett said. The WA government is currently reviewing its royalty system.

"I think it is flawed in trying to manage the world price of a commodity. When anyone has tried that, whether it's been minerals or agriculture or anything else, it usually ends it tears," Barnett said. "Right now there are tears within the West Australian government."

km/rjd

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