The week that was
The price of iron ore is marching lower and in doing so, it is posing a downside threat to national income and importantly, the budget revenue numbers. While the Chinese economy continues to register solid economic growth, demand for iron ore is easing, which has forced the price from around US$79 a tonne during February to under US$65 a tonne.
While this price remains well above the average cost of production for the large iron ore miners, lower prices eat away at profits which is one reason why the likes of Rio, Fortescue and BHP have been under pressure over the past few weeks.
For the government as it frames its budget which is set to be delivered on 8 May, the startling fact is that a US$1 a tonne move in the iron ore price can impact the budget bottom line by $420 million per annum. It can only hope that there are no more price falls in the next few weeks as the budget numbers are finalised. Any further significant price drop would impact its ability to fund the company and income tax cuts that seem to be the bedrock of its re-election strategy.
The week ahead
After the Easter weekend, there is the veritable blockbuster of economic news next week. The highlight, at least emotionally, will be the monthly meeting of the RBA, but no one seriously expects any change in the cash rate or the RBA’s rhetoric when the policy press release hits the wires.
More importantly will be the updates on the economy into the early months of 2018, with the release of monthly inflation, the illion business expectations survey, retail trade, building approvals and international trade. All are important guides. Retail trade will be watched for signs of any life after a disappointing Christmas/New Year period. Building approvals have been resilient over 2017 which means there is a pipeline of new supply of dwellings coming on to the market in the next 12 to 24 months. Will there be a glut? House prices are already falling. The international trade surplus should be strong as the high commodity prices and the strong world economy work to boost export receipts.
Let’s hope the numbers are strong.