Australian woes

Australia: Mining woes hit budget

The federal government's surplus - and Labor Party promises - will come under intense pressure from a drop in metal prices of up to 16 per cent over the coming year.

the Age,

19 September, 2012

The prices of metal exports plunged 11 per cent from May to August - and the government's official forecaster tips iron ore income to slide 16 per cent this financial year and coking coal income 15 per cent. These are Australia's two biggest exports. Even if the income drop stayed at 11 per cent, it could cost the budget $7 billion this year and $14 billion next year - and 150,000 jobs, according to an Age analysis.

The mining tax - which targets the super profits of miners and whose projected proceeds have already been earmarked for expenditure - would be hard hit.

The turnaround follows miner Rio Tinto's warning that it will find it "increasingly hard" to justify further investment in Australia apart from in the Pilbara, and as Resources Minister Martin Ferguson says Australia is at risk of missing out on the next wave of global investment unless it controls costs.

The Reserve Bank signalled in board minutes released yesterday that it was prepared to cut interest rates at its next meeting if needed, drawing attention to a 35 per cent slide in iron ore spot prices since June and a 25 per cent slide in coking coal spot prices. It said both slides would be "reflected relatively quickly" in export prices as an increasing amount of Australia's exports were being sold for spot prices or on short-term contracts. Iron ore and coking coal are Australia's first and second-biggest exports.

The chief of the Bureau of Resources and Energy Economics - which made the forecasts - told a mining conference yesterday commodity prices had peaked and will no longer drive national income growth.

''That phase is behind us," chief Quentin Grafton said. "We are in the 'let's roll up our sleeves' phase.''

Treasurer Wayne Swan will today try to draw attention away from the resources slide, telling a Canberra conference he "never thought record high prices would continue forever".

He will say Australia will be in the "box seat" for Asia's re-emergence as mining cools, enjoying a "broader suite" of services built on the expansion of Asia's middle class.

"There will be greater opportunities in everything from agriculture and food, to travel and tourism, to education, engineering, arts and architecture, to banking and financial services," he will tell the conference.

"As well as things we haven't dreamed up yet."

The bureau has cut 10 per cent from its forecast of Australia's mining and energy earnings, predicting a dip of 2 per cent this financial year instead of the previously forecast increase of 8 per cent.

Shadow treasurer Joe Hockey told his party yesterday the cuts would wipe $20-$25 billion from the Commonwealth budget.

Mr Hockey said several departments had been asked to change their accounting practices in ways that would be illegal if they were private companies. The government would bring forward its mid-year review, he said.

But the government says the hit to revenue will be smaller and it is not planning to bring forward the review.

Rio Tinto's Australian chief David Peever told the conference falling prices and rising costs made new investments in Australia tough to justify.

Countries such as the Democratic Republic of Congo, Mongolia and Mozambique, that used to be considered too risky or dangerous, were now real options.

''Let's be very clear. Australia now has serious competitors across a number of commodities where we previously held the edge,'' Mr Peever said.

Mr Ferguson said Australia risked missing out on the ''second investment pipeline'' of potential mining projects worth up to $230 billion unless it could cut its costs or become more productive.