Outlook bleak for iron ore

The industry drove nearly half of Australia’s economic growth in the past decade but there is unlikely to be a reversal in the near term to this year’s shock price plunge that has ripped $90 billion out of revenue forecasts, according to the federal budget papers.

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Given that China buys 80 per cent of Australia’s iron ore and the former’s housing market is substantially oversupplied, a significant recovery is not expected soon.

The fall in the price of Australia’s most valuable export was described in the budget papers as the most significant development since last May given its sensitivity to the price, with forecasts for 2015/16 down to $US48 a tonne from $US96.

“The continued weakness in China’s housing sector is expected to weigh on China’s demand for iron ore in the near term,” the budget papers said.

Yet at a time when demand was falling, Australia alone would add 50 million tonnes of exports this year with Brazil to add another 90 million tonnes by mid 2016.

Iron ore exports had doubled in the past five years and would rise another eight per cent this year to 770 million tonnes, with Australia the world’s biggest exporter and representing one third of global production.

Those expansions in supply have led to a war of words within the industry and with politicians, with Fortescue Metals chairman Andrew Forrest accusing BHP Billiton and Rio Tinto of damaging the economy.

The price falls and weaker-than-expected recovery in the global economy in the past year had presented Australia with difficult challenges, Treasurer Joe Hockey said.

The nation’s terms of trade – export prices compared with import prices – suffered the largest fall in half a century, contributing to a significant fall in tax receipts.

“Through careful planning we are successfully navigating the difficult transition from a mining investment boom, to one of broader-based growth across our economy,” Mr Hockey said.

The budget papers talked up the significant investments in liquefied natural gas making a strong contribution to exports and Australia overtaking Qatar as the largest exporter.

But mining investments were expected to decline further by 25.5 per cent in 2015/16 and 30.5 per cent in 2016/17, reducing GDP growth by four percentage points.

New mining discoveries were at their lowest level in a decade, which does not augur well for Australia when there is another mining boom, the Association of Mining and Exploration warned in its budget submission.