Those gloomsters bent on seeing slump and downturn in every figure from China or Europe or Middle Eastern riot had better hang on a bit longer, prices for iron ore (our biggest export) are about to have another surprise boost.
According to industry reports, prices for the June quarter for BHP Billiton, Rio and their big competitor from Brazil, Vale, could rise by 20%, based on prices in the spot market from November to yesterday.
That will boost prices in the Asian market (which sets global prices) to about $US180 a tonne for ore of 62% iron content (including freight of about $US6.50 a tonne) ex-Port Headland.
That’s considerably above forecasts from the federal government’s resources experts that were issued this morning. They will also add to concerns at the Reserve Bank, which has its monthly board meeting on interest rates today.
Not only will that be a 20% increase on prices for this quarter of about $US149 a tonne, but they will be 40%-45% higher than the prices in the June quarter of 2010. That means the big exporters are going to enjoy another boom six months with exports remaining high and prices at record levels.
But there’s another major development that will further boost prices over the medium term. In a surprise move, India, the world’s third biggest exporter after Australia and Brazil, on Monday revealed a tripling of export taxes on its iron ore exports. That comes as Indian exports have fallen 17% in the past six months of 2010 and remain weak as the country faces expansion restrictions and a growing desire by the national government to conserve the ore for its own steel industry.
The high taxes will see Indian export prices rise, a move that will push up spot prices and be resisted by steel mills. Prices will then fall, but Indian exports will fall as the companies protect profits by directing exports into the domestic market and avoid paying the higher taxes. That will take more supply from the market, boosting the underpinning for a substantial improvement in iron ore prices past the next few quarters.
According to news agency reports, India’s finance minister, Pranab Mukherjee, justified the rise in the export taxes saying iron ore was a “natural resource which needs to be conserved”. That will be music to the balance sheets of BHP Billiton, Rio, Vale, Fortescue, and the federal government. it will also worry the hell out of the Reserve Bank, which is already concerned that the expected slowing in our terms of trade and national income this year won’t happen.
It’s also likely that iron ore prices will remain solid into 2012-13 if the Indian taxes are not dropped. India’s move is bullish for spot prices, which will now probably remain around current very high levels until the impact of the new taxes is seen on Indian supplies of ore in coming months. But they will almost certainly fall, intensifying the current shortage of high grade iron ore that only Australia and Brazil currently supply.
But the June quarter price rise and the news from India have made today’s new forecasts of commodity exports and prices (especially for iron ore) from the federal government out of date.
The new forecasts were issued in the March commodity outlook from the Australian Bureau of Agricultural and Research Economics and Sciences (ABARES).
The updated forecasts contained new estimates for export income (prices and volumes for all mineral and agricultural exports) as well as forecasts out to 2015.
ABARES has forecast that Australian iron ore exports will reach 390 million tonnes in 2010-2011, rising to 585 million tonnes by 2014-15. Export income is forecast to almost double, from $35.49 billion to $68.26 billion. Iron ore is easily Australia’s biggest single export now.
That forecast for the next few months at least has been overtaken by the 20% rise now expected for the June quarter, while the news of the higher taxes on Indian exports will put further upward pressure on spot prices in coming months, offsetting any weaknesses that had been forecast.
The news of the sharp increase for iron ore exports for the June quarter will add even more pressure to our terms of trade and national income, and in turn boost the prospects for possible two or more interest rate rises from the RBA. The timing remains uncertain, but we will see the rate increase happen sooner rather than later.
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