Treasury sees iron ore at US$55 a tonne next year

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One of the key numbers many look for in the budget is the forecasts for the iron ore price, an understandable outcome given its importance to budget revenues as Australia’s most valuable goods export.

For 2016/17, treasury now see the spot price of US$55 a tonne, a significant increase on the US$39 a tonne level forecast in the 2015/16 mid-year economic and fiscal outlook last December.

It’s important to distinguish that the forecasts are for free on board (FOB) spot pricing, something that does not take into account freight costs as seen in the more commonly cited cost and freight (CFR) spot pricing.

“A key risk to the nominal GDP forecast is the volatility and uncertainty around movements in commodity prices,” said treasury. “The inherent uncertainty around both supply and demand factors means the outlook for the price of iron ore is subject to considerable risk.”

Based on sensitivity analysis from treasury, a US$10 per tonne reduction/increase in the iron ore price would result in a $6.1 billion reduction/increase in nominal GDP in the upcoming fiscal year.

Here is the treasury analysis, only in table form, showing the impact on nominal GDP and tax receipts from a US$10 deviation in the forecast price.

It’s based on an exchange rate assumption of 77 US cents.

On Tuesday the spot iron ore price, including freight costs, fell by US$2.83 to US$63.41 a tonne according to Metal Bulletin.

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