The forecast iron ore price in this month’s economic update will be significantly lower than the $US48 ($66) annual estimate in the May budget, punching a hole in expected revenues and delaying further any return to a budget surplus.
Confirmation of the downgrade came amid predictions ore could soon be trading at a spot price below $US40 a tonne as collapsing steel demand in China pushed the commodity to record low prices.
The Australian Financial Review has been told the May forecast will be “manifestly” downgraded in MYEFO. As a rule of thumb, every $US10 fall in the price equates to about $2.5 billion a year in lost revenue, or $10 billion over the forward estimates.
For the last time, the Budget price is FOB not CFR (benchmark) so you have to add $7-8 to reach the spot price equivalent. Thus the Budget forecast is for $55-56. What should it be cut to? I’d recommend using some formula from futures markets.
The current price for Dalian six month futures is $37. Singapore 12 month swaps are pricing $33. Split the difference and use $35 CFR, or, in FOB terms, $28. That’ll slice roughly $6 billion per annum from forward estimates!
It’s either that or lie and look like a goose again. Guess which one they’ll choose?
