Australia extends forecasts for iron ore price strength

The Australian government has extended its forecast for stronger iron ore prices by six months, as it expects record prices to drive economic growth and improve its terms of trade despite growing tensions with China.

The Australian treasury now forecasts iron ore prices to fall to the long term average of $55/t fob Australia only by the end of March 2022, rather than the end of September 2021 as previously predicted. And there is further upside risk to its guidance given strong global steel demand.

"A stronger recovery in steel production outside of China could also provide further support for iron ore and metallurgical coal prices," the treasury department said in the 2021-22 federal budget released today.

China takes around 75pc of Australia's iron ore exports, while Australian iron ore makes up around 60pc of China's total imports of the raw material, according to research by Swiss bank UBS. This appears to make the iron ore trade too important to both countries to be dragged into the diplomatic dispute that has led Beijing to ban all imports of Australian coal.

Fortescue Metals is the most exposed of the big four Australian iron ore producers to China, followed by BHP, then Rio Tinto and finally Roy Hill. But even Roy Hill, which has South Korean shareholders, still ships around 65pc of its ore to China.

Beijing's ban on Australian coking coal imports has disrupted trade flows and pushed down the price of hard coking coal, as well as removing its premium to lower-grade Pulverised Coal Injection (PCI) supplies. Canberra expects the metallurgical coal spot price to stay around $122/t fob Australia to the end of March next year.

Iron ore's importance to Australia's budget was shown in the treasury's sensitivity analysis. An immediate fall to $55/t fob would cost Australia A$8.3bn ($6.5bn) in lost taxes compared to current scenarios, while the maintenance of current prices to the end of March would add A$5.5bn, the analysis shows. Canberra recorded a deficit of just A$690mn in its last pre-Covid 19 budget, in 2018-19, but expects the deficit to be A$161bn in 2020-21 — the largest on record.

Argus assessed the ICX iron ore price yesterday at a new high of $230.05/dmt cfr Qingdao on a 62pc Fe basis, up from $167.45/t on 1 April and $159.90/t on 31 December. Argus assessed the premium hard low-volatile coking coal price at $110.95/t fob Australia today, down from a recent high of $157.35/t on 2 February.

By Jo Clarke