Surprise jump in commodity prices may not be enough to save Australia's AAA credit rating
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Twelve months ago the mining boom was well and truly over. The prices of iron ore and coal had crashed — and then China stopped mining its own coal on weekends.
The move was "designed to decrease capacity in coal in China but also increase the price of thermal coal in China given that the thermal coal producers were making losses for quite a while," said Brad Potter, the head of equities at Nikko Asset Management.
It worked spectacularly.
The price of thermal coal, used in generating electricity, leapt 60 per cent.
But coking coal, used for making steel, leapt fivefold.
"To try to mitigate that cost impost, they increased their demand for high grade iron ore, which actually reduces the amount of coking coal they need in their blast furnaces," Mr Potter explained.
Last January iron ore was languishing at $40 a tonne — less than a quarter of its record high five years earlier. Today it's $91 a tonne.
Thermal coal is up from $52 in January 2016 to $84 a tonne.
While coking coal soared from $73 a tonne to $309 before dropping back to its current price of $168.
For a country like Australia, where iron ore and coal are two of our biggest exports, and China our biggest customer — it means a lot more money for the Government's coffers.
"If you are expecting iron ore prices to be $50 a tonne and they're now $80 a tonne, that's worth from $5 billion to $7 billion, so you get a lot more money," NAB chief economist Alan Oster said.
But it's not just the public purse that benefits.
Australia will benefit from Rio's spending: economist
As Rio Tinto's recent profit result showed, the big iron ore and coal miners are also back in the money.
Rio is planning to boost capital spending by $2 billion next year, and that, according to CommSec chief economist Craig James, means the whole country will benefit.
"When you think about the producers in certain areas, whether it's in Queensland or Western Australia, there's extra income coming through in terms of those areas," Mr James said.
"If that gets filtered out into the local economy you have this multiplier effect of the income working its way across the Australian economy."
Higher iron ore and coal prices support mining company dividends, and also Australians' retirement incomes through their superannuation funds.
"No doubt in that portfolio is going to be the big banks and the big miners. If the miners are doing well in terms of their income, in terms of their profitability, that should push up their share price and should be good for superannuation returns."
But for one man, all the extra money flowing into the country could be to no avail.
The threat to Australia's credit rating
Treasurer Scott Morrison is trying to save Australia's prized AAA credit rating, burdened by a $37 billion budget deficit.
But as his department's mid-year economic forecast explained in December, the extra tax collections from higher iron ore and coal prices "will be more than offset by the impact of weaker growth in aggregate wages and non-mining profits across the forward estimates".
Which means ratings agency Standard & Poors will probably carry through on its threat to cut Australia's credit rating.
Mr Oster said the real-world impact would be felt by bank customers, who would pay more when they took out a loan.
"You would probably say that offshore borrowings is about a third of our total funding, so you'll get an increase in banks funding costs, which I think banks will probably pass on," he said.
Just what an embattled Treasurer doesn't need.
As for the outlook for iron ore and coal, and the boost to Government revenue over the past year, Mr Morrison won't like that either.
"The underlying demand for iron ore is not as strong as what the price is suggesting and I note that even Rio Tinto and BHP have recently said pretty much the same — that the prices we're seeing are not sustainable over the long term," Mr Potter argues.
Mr Potter sees iron ore plunging back to $50 a tonne, with coal also heading a long way south.
Topics: business-economics-and-finance, money-and-monetary-policy, government-and-politics, federal-government, budget, iron-ore, coal, australia
