The Australian economy

Cooling Mine Boom Pressures Australia Budget

Return to Surplus Questioned, as Windfall from Resource-Related Revenue Disappears and Big Mine Projects Are Shelved

WSJ,

30 August, 2012

It is getting harder for the government of Prime Minister Julia Gillard to meet a promise to return to a budget surplus this fiscal year, as iron-ore prices plunge and the country's biggest mining company cancels billions of dollars in new projects amid a slowdown in Australia's resources boom.

Erasing a 44 billion Australian dollar (US$46 billion) budget shortfall is a pillar of the government's economic policy ahead of a general election expected late next year. The revenue to pay for this economic blueprint was supposed to come partly from a new tax on profits from the sale of mineral resources and higher corporate-tax receipts, driven by what the government still boasts is a once-in-a-century mining boom.

But the sharp slide in commodity prices and signs of retrenchment by Australian miners over recent months has put that plan at risk. From copper mines in tropical Queensland state to big iron-ore pits in the country's west, mining companies are idling equipment and laying off workers.

BHP Billiton Ltd., the world's largest mining company by market value, said it would lay off some employees after it shelved plans last week to invest an estimated A$30 billion to expand a copper and uranium mine in South Australia. In an effort to conserve cash, the company also said Monday it agreed to sell its Western Australia uranium deposit to Cameco Corp., CCJ -0.18% of Canada, for US$430 million, subject to regulatory approval.

Commodity prices have been declining globally since early this year, in line with slower growth in China, but while coal prices recently have stabilized, the fall in iron-ore prices—Australia's biggest export commodity—has deepened.

Iron ore traded Thursday at $88.70, having dropped 24% in August alone—far below government estimates. In April, when the government was completing its budget, the global spot price for iron ore was at US$149.40 a ton.

With coal prices at half their peak of 2008 and iron ore now below $100 a ton, some economists are forecasting about a A$10 billion shortfall in the government's expected tax receipts. Iron ore and coal account for a third of Australia's total exports, and the largest share of its outbound trade with China.

Adam Boyton, chief economist at Deutsche Bank, estimates a revenue shortfall from the price drop will create a budget deficit equivalent to 1.5% of the country's A$1.4 trillion economy.

"They will have to save billions through new decisions if they are going to get the surplus," said Chris Richardson, a partner at Deloitte Access Economics and a budget analyst.

In its latest forecast in June, the Bureau of Resources & Energy Economics, said it expected iron ore, a steelmaking ingredient, to average US$136 a ton in the current year, and US$131 in 2013. At the same time, it forecast thermal coal, a poorer quality fuel used across Asia for power generation, would average US$115 in 2012, sharply higher than Monday's spot price of US$89.05. BREE's forecasts are used by the government's economic planners to guide policy.

Treasurer Wayne Swan played down the impact of falling commodity prices at a Tuesday news conference, saying the government will hit its budget-surplus target.

The government is scheduled to present a budget update before the end of the year, and is expected to stick to a forecast of a A$1.5 billion surplus for the fiscal year ending June 30.

Some economists are betting the shortfall in resources-related revenues would force a change of policy to meet that goal, including heavy spending cuts and new tax sources.

Either move at bolstering the budget would be unpopular with voters. Since coming to power in 2010, Ms. Gillard has been hurt in opinion polls by reactions to her handling of key policy issues, including a new tax on emissions and a rise in the number of asylum-seekers attempting to reach Australia..

In a survey of 1,400 voters released Monday by pollster Nielsen, support for the ruling Labor Party was at 46% on a two-party preferred basis, below the 50% the party won in the 2010 election. The main opposition Liberal-National coalition was at 54%. The poll has a margin of error of plus or minus 2.6%.

The economy had been one of the government's main bragging points. It had hoped that planned investments of A$500 billion in mining and resources projects would ensure the economy continued to sidestep the woes faced in Europe and the U.S. That spending drive has lost steam, while banks have become less willing to lend.

Moreover, the controversial mineral-resources rent tax, or MRRT, which since July 1 has imposed a 30% levy on profits from iron-ore and coal production, is expected to miss a target to bring in about A$6.5 billion over the next two years.

Without deep spending cuts, Macquarie Securities is forecasting a budget deficit of about A$9 billion in this fiscal year as the falling commodity prices and lower company profits wipe about A$10 billion from forecast tax receipts.

The longer the government delays any decision on adjusting its budget based on lower revenue "the larger the cuts would have to be to rescue the surplus," said Brian Redican, a senior economist at Macquarie.