Federal budget rides the iron ore bull

The Australian Bureau of Statistics (ABS) yesterday released its International Trade Price Indexes for the March quarter of 2021, which revealed that export prices rose by 11.2% over the quarter and by 8.6% through the year.

The increase in export prices was driven by an 18.2% quarterly rise in metalliferous ores and metal scrap prices driven by strong iron ore demand from China and constrained global supply owing to the tragic dam ­failure at a Vale mine in Brazil in early 2019.

Over the year, metalliferous ores and metal scrap prices surged by 49.8%, again driven by soaring iron ore prices.

Iron ore prices

Iron ore prices are approaching $US200 a tonne.

By contrast, import prices rose by only 0.2% in the March quarter and fell by 6.2% through the year.

The change in the import/export price index gives a good proxy for Australia’s terms-of-trade (ToT). As shown in the next chart, Australia’s ToT is looking at a circa 11.0% increase in the March quarter and a 15.8% increase through the year:

Australia's terms-of-trade

Australia’s terms-of-trade should record a massive rise in Q1 2021.

The importance of this cannot be understated. The ToT measures the average price level of exports to the average price level of imports. Thus, when the ToT rises a given quantity of exports can pay for a larger quantity of imports, effectively granting the nation a pay rise.

The ToT, therefore, is a key determinant of national income, as well as a key driver of government finances via company tax receipts.

Indeed, UBS yesterday forecast that tax revenue could rise by $US20 billion in the federal government’s 11 May Budget due to the strong iron ore price. The spot price of benchmark iron ore has risen by 130% in the last year (see above chart), and it recently peaked at around $US193 per tonne. The federal government’s previous revenue forecasts were based on an average iron ore price of just $US55 per tonne in 2020-21.

Macquarie also believes that the price of iron ore could soon top $US200 a tonne, although Vivek Dhar of the Commonwealth Bank says an easing of demand in China could see the price fall to around $US110 per tonne by the end of 2021.

Much like they did between 2009 and 2012, the federal budget and company profits will ride the iron ore boom. The main difference this time around is that the price boom is not being matched by increased mining investment, which means there will be little spillover into jobs and wages. It is largely a profitless boom for Australian workers.

Unconventional Economist

Comments

  1. Broad-based inflation is coming, if it hasn’t already started. You know price of everything will be rising when “used car prices are booming”. Iron ore cannot be an exception.

    If people still buy into the AUD being a commodity currency narrative, AUD will go to the moon.

    • A bottle of Black Douglas has risen from $29 to $40 in a year.
      Johnny Walker Red, slightly less.
      Ouzo, more.

      Not that I partake of the first two, I just notice them for interest as I had to the aisle with 20 YO single malts. They mix particularly well with Pepsi.

  2. So Australia is a diversified economy & country that sells Iron Ore to a single country! LOL.
    What could possibly go wrong?
    Just as well we have the export industry of OS University students worth $40B apparently!!! That’ll surely be better than Iron Ore?
    And of course with the rate of increase in OS students as an export I reckon by end of 2025 the amount will be quoted as $90B!!!

  3. Savvy Mum and Dad Investor

    My metal stocks I think will double this year if metals stay where they are right now.

    DLS has gone hard for a H2 2021 commodity bust but I’ve gone 180 degrees the opposite with my investments. Time will tell who is correct.

    But I do like DLS for his commitment to his beliefs.

    • For shame, Savvy. You ought to buy Sims Scrap Metal instead. So ecologically pure, yet still offers good ASX gains.

      On a serious note, our colonial Australian Budget is always seriously reliant on Hancock-Wright iron-ore prices. Which is why Juukan Gorge will happen over and over again. This works well for the London shareholders.

      • These volumes are absolutely NOT normal – there is clearly something going on, on a vastly larger scale than seasonal fluctuations in apartment construction which are as steady as a heart beat – there is literally almost no variation in it – this price spike is 100% being driven by something on the edge – can’t be just a massive rail project.

        • The Traveling Wilbur

          Ding. Give that homosapien a carcenogenic-free vaping product.

          Been thinking the same. For two years now. Been patiently waiting for DLS to explain what projects all the increased volume is being delivered to. But no. Many times OBOR has been ruled out as a significant driver, but no, no alternate explanation for all this has been forthcoming.

          I’m beginning to think the Chinese are chucking it down their own shuttered coal mines after it lands there. So they can dig it up again later. Think of the volume extracted per day figures for those sites!

          (and that’s a more credible explanation than anything anyone has posted here)

          • Display NameMEMBER

            My understanding is that China has stockpiled at times well in excess of 100MT of ore. Maybe be this is a surge before they kneecap Australia with a 50% cut in ore orders.

        • pfh007.comMEMBER

          RH,

          Yep, agree.

          For China to be willing to pay such high prices and buy in such volumes suggests they are up to something.

          We need to know where our iron ore is going once it is offloaded in China.

          They may be building a large stock pile of ore or steel for any number of plausible reasons that range from a buyers strike to making things that go bang.

          • Do artificial islands require a lot of steel? maybe new tunnel networks from China to Africa lol

          • It was reported in mainstream media – Nine News – about their development of new missile silos.

            They have spent VAST energy on their Great Steel Wall – this is a subterranean military transport network of tunnels which can accommodate 4 lanes of military transport vehicles and it is thousands of kilometers long.

            There are also a LOT of noises being made about two new meta-materials – one is a cellulose web which is ultra light and stronger than steel – the other is for “bunkers” and is an allow of Magensium, Zinc and Steel which they are using to build their military network.

            Whatever it is – there is ZERO chance this is apartment construction – and their rail network which is significant consumer simply could not explain this.

            They do vast infrastructure projects over seas – not including their OBOR initiative and is a significant driver of their export dollars – but still – this is crazy levels.

            They have something like 30,000 high rise towers worth of ore sitting in their ports….

            In 2008 Ore went from $190 to $72 in less than 12 weeks.

            Scary as hell.

  4. happy valleyMEMBER

    A massive puff piece in the AFR glossy magazine today on gold standard Saint Gladys, the micro manager – she would seem to need some more training in micro managing having regard to the large cost overruns on the light rail and the metro, WestConnex apparently being the most expensive to build per kilometre piece of tollroad, the wasted exercise on the Powerhouse Museum move, the unnecessary demolition and rebuild of Allianz Stadium and the forgotten need for accommodation for the homeless etc?

  5. Stage 3 tax cuts you little ripper. Lock that sh$t in Eddie.

    Much like a Demons deep finals run, Petracca Brownlow and an epic Bulldogs Demon Round 11 clash both at 11-0.

    • Mike Herman TroutMEMBER

      Didn’t know what you were talking about there Swampy but have now realised…. you beauty….
      demons have all bases covered on field….playing real good footy….

      • A fellow MB Demon? I had a 22 leg multi on at 1050-1 v Richmond and only missed 3 legs – Lynch >1 goal, Riewoldt > 2 goals and Dusty > 25 possessions. Who knew we’d have had that outcome. 7-0 this week a lock. BBB to kick 10.

        • Mining BoganMEMBER

          Demon supporter at work is more nervous about the Kangaroos game than any other game this year. Reckons these should win one are the games where they always disappoint him.

          He’s a long time disillusioned supporter, although he has been up and about lately.

          • He sounds like most of us : MFCSS (Melb FC Supporters Syndrome).

            Nope, this game is a lock. Ben Brown in his home state. The trick with this game is finding a reasonably priced multi considering NMFC legs. A loss will be a win under 10 goals, I’d like to see a 20 goal win as payback for the unending misery they inflicted for I think 12 years.

            In the old days I’d agree this is a danger game for MFC, but not this year. Something’s different. For mine, the Sydney, maybe Carlton are the danger games. Adelaide a test then the Dogs Friday night blockbuster, both could be 11-0.

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