Treasury delivers iron ore warning

Budget papers predict iron ore prices will drop below $100 per tonne in the year ahead.

Treasury has warned that iron ore prices could fall below $90 ($US83) a tonne within two years due to oversupply and weak demand for steel, but says the slump will be offset by increased demand outside the resource sector that will underpin higher profitability across corporate Australia.

The budget papers predict iron ore prices will drop below $100 per tonne, or $US93, in the year ahead and continue a slow decline until June 2016, sounding alarm bells for marginal producers in the resource sector.

In the past fortnight the iron ore price has retreated back towards the $US100 a tonne mark after a temporary recovery in April, weighing on the share ­prices of the big Australian producers such as BHP Billiton, Rio Tinto and Fortescue, as well as their smaller rivals.

The price fall is expected to lead to further consolidation among mid-tier players that are battling the impact of soaring input costs and increased competition for capital.

The budget papers say the timing of the decline in resource investment remains one of the greatest risks to the economic outlook, coupled with uncertainty about the timing of the recovery in non-resources sector demand.

“Investment in resources projects has passed its peak and is expected to detract significantly from growth over the next three years. While there is some confidence about the size of the decline in resources investment, the precise timing of the fall remains less certain,’’ the budget papers say.

In the fourth quarter of last year Australia’s economy grew by 2.8 per cent from a year earlier, compared with growth rates two years ago of 4 per cent, reflecting the resources sector’s slowdown.

The Reserve Bank has cut interest rates eight times over the past two years, sticking at a record low of 2.5 per cent as the central bank keeps a neutral position on its next move.

But economists expect a pick-up in growth could lead to a rate rise in the next 12 months.

Commodity prices are also set to come under pressure in the liquefied natural gas sector, with Treasury acknowledging the threat posed by exports from the US to Australia’s spate of new multi-billion-dollar LNG projects.

“While this is unlikely to have a large impact on current LNG projects, which have long-term contractual arrangements, additional US supply to the Asia-Pacific region would affect the feasibility of new or expanded operations in Australia,’’ the budget papers say.

Receipts from Petroleum Resource Rent taxes have been revised down by about $1.3 billion over the four years to 2016-17, while takings from the Minerals Resource Rent Tax this year are expected to be $100 million and $100m in 2015-16, less than 2 per cent of the original amount envisaged.

New engineering construction is expected to fall by 13 per cent this year and 20.5 per cent next year, reflecting the impact of the slowdown in the resources sector.

While new private business investment is forecast to fall by 5.5 per cent next financial year and 3.5 per cent the following year, Treasury is banking on the non-resources segment of the economy to rebound in two years.

Over the four years to 2016-17, company tax receipts have been revised up by about $4.7bn, reflecting higher corporate profitability. Receipts are forecast to grow by 1.6 per cent in 2013-14 and 5.3 per cent in 2014-15.

But consumption by higher income earners is set to suffer from the temporary introduction of a deficit levy that has divided business leaders.

Hills chief executive Ted Pretty cautiously welcomed the levy, backing the views of Boral’s Mike Kane and JB Hi-Fi chief executive Richard Murray. “If we can be ­totally confident it addresses the deficit issue, I am comfortable with it,’’ Mr Pretty said.

But Business Council of Australia chief executive Jennifer Westacott said she did not support a deficit levy because of its short-sightedness.

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