CBA: Iron ore to crash in 2021

Gareth Aird, head of Australian economics at CBA, has written a new note examining the outlook for Australian commodity prices in 2021.

Aird sees commodity prices “remaining well supported in 2021” on the back of “momentum in the global economy”. This will keep Australia’s terms-of-trade elevated in 2021, thus supporting national income as mining profits lift and government “coffers swell”:

However, CBA expects iron ore prices to decline by more than 40% over the forecast period (from ~$US140/t to $US90/t) as China’s demand impulse eases and “policymakers place more emphasis on a shift away from investment led growth to services and consumption”:

Iron ore: Prices are forecast to remain high in H1 2021 as China’s stimulus measures from 2020 keep China’s steel demand supported. We look for the spot price of iron ore to trade around $US140/t by mid-2021. From there we expect prices to move lower over H2 21 as policymakers deprioritise growth in China’s commodity-intensive sectors. We forecast the price of iron ore to be ~$US110/t by end-2021.This is well above the marginal cost of production.

By contrast, coking coal prices are forecast to increase on the back of rising demand outside of China, alongside China relenting on its coal import quotas in December amid shortages.

Overall strong commodity prices over 2021 will support nominal GDP, which is forecast by CBA to “post a strong 6.5% increase over 2021 (real GDP is forecast to grow by a robust 4.2% in 2021)”:

Accordingly, CBA expects the Government’s fiscal position to improve, alongside “material upgrades to the Government’s forecast profile for the deficit in the May 21 Budget”.

Large monthly trade surpluses will continue (averaging $A7 billion per month over 2021). And “this should see the current account surplus average 3% of GDP in 2021”:

Elevated commodity prices should also support the Australian dollar, which CBA forecasts will trade “around $US0.80 in 2021”:

CBA also cautions “that the risks on our prices outlook for iron ore, coking coal, thermal coal and LNG are all skewed to the upside”.

Thus, Australia’s commodity price outlook remains strong overall, despite the sharp forecast decline in iron ore prices.

Unconventional Economist
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  1. Following on from MB’s excellent posts on the exorbitant gas cartel rip-off there was an interesting Australian Parliament session yesterday.

    In the Senate question time Senator Hanson asked why her question on the PRRT had not been answered and at the same time stating “In 2019-20, these foreign owned oil and gas multinationals controlled most of the offshore oil and gas leases. They exported $48 billion worth of liquefied natural gas to Japan, China, South Korea and other Asian countries. As owners of the gas, we received a payment of about $200 million in 2019-20—that is, one twenty-fifth of one per cent of the $48 billion in sales. The other 99.996 per cent of the $48 billion went to the companies to cover costs and generate profits. None of that 99.996 per cent was paid as income tax, because these transnational companies have $350 billion of tax credits courtesy of the PRRT law that was introduced by Labor in 1987.”

    And laughing Senator Seselja stated “The Liberals and Nationals can deliver the secure, reliable and affordable energy that will underpin our economic recovery, create new jobs and grow our manufacturing sector.‘ but made it clearly known where his support lies when he said “We support the gas industry whether the Labor Party does or not.”

    Minister Birmingham finally relented and accepted he had to answer Question No. 2391 by 15 March 2021.

    • Was there any mention of domestic gas reservation policy as the answer for the East Coast Economy’s woes? The greatest act of treason of our time carries on, and sails into the sunset most evenings out of the port of Gladstone. Canberra should be extremely embarrassed by the state of our gas export industry and lack of domestic reservation!

      • It was mentioned “The best interests of Australia will be served by the government acting to introduce a domestic gas reserve policy for Australia’s offshore waters so that 15 per cent of all gas comes into Australia; changing the PRRT laws so we get fair payment for our oil and gas; removing multinational oil and gas companies from the company tax system and putting them in a transaction based tax system; and investing in re-gassing terminals in the eastern states to bring offshore cheap gas from the west or building a gas pipeline from west to east.”

        But as we have all seen the Australian people have few representatives in parliament unlike the multinationals. At least MB’s comments are slowly gaining traction, I just hope I live long enough to see positive change.

        • I share those sentiments.

          I’m astounded that domestic reservation doesn’t have more public weight behind it…. maybe its lack of education & understanding about energy market fundamentals, but this is one of the greatest sellouts our nation has seen, ever. The foregone prosperity must be tens of billions of dollars annually, its disgusting