Australia Halves Iron Ore Price Forecast in 2015 Federal Budget

The slumping iron ore price has hit those involved in the space hard in the last year, with many companies reducing production and halting new construction.

Now the Australian government has gone into defense mode with its Federal Budget 2015 report, which includes a conservative 12-month iron ore price estimate of $48 per tonne. That’s half the amount predicted in last year’s report.

Treasurer Joe Hockey’s cautious outlook is not necessarily unexpected — after all, bigger-than-expected commodities price drops have destroyed Australia’s revenue targets in the past three federal budgets.

Further highlighting the state of Australia’s finances, the Federal Budget 2015 report states, “[t]he underlying cash deficit is expected to be $35.1 billion in 2015‑16 (2.1 percent of GDP), reducing to $6.9 billion (0.4 percent of GDP) in 2018-19. Forecast tax receipts have been downgraded by $52 billion over the four years to 2017‑18 since the 2014‑15 Budget. This has been driven by a near halving of the iron ore price and persistently low wage growth. The fall in commodity prices has contributed to the largest fall in the terms of trade in over 50 years.”

Banks don’t see bright future for iron

While Hockey’s iron ore price estimate is fairly dire, it’s worth noting that it’s on the low end of the spectrum.

For instance, it’s less than the $60 price predicted by Australia’s Office of the Chief Economist in its Resources and Energy Quarterly report. It’s also lower than the US$45 predicted by UBS Group (NYSE:UBS) for 2015 and less than Australia and New Zealand Banking Group’s (ASX:ANZ) prediction of $56.

Meanwhile, Goldman Sachs (NYSE:GS) maintains that the iron ore price will average $52 in 2015, though it’s said that now is an opportune time to bet against the metal as its price is likely to resume its decline amid rising supply and weak demand.

“Market fundamentals will reassert themselves sooner rather than later,” analysts Christian Lelong and Amber Cai wrote in a report Monday. “Investors may consider this as a window to take short positions.”

“No major producer has revised their long-term production targets downward,” their report also states. ”The rally is taking place during the early stages of a long bear market that in our view is set to last well into the next decade.”

Other analysts are in the same boat, with The Sydney Morning Herald quoting Investec (LSE:INVP) as saying that recent announcements from industry giants Vale (NYSE:VALE) and BHP Billiton (ASX:BHP,NYSE:BHP,LSE:BLT) are cosmetic and “will do little to address oversupply.”

Fortescue steps up

That said, at least one major iron ore player is interested in bringing balance back to the market. Australia’s Fortescue Metals Group (ASX:FMG) has been attempting to create some solidarity amongst large producers for some time, and on Monday Chairman Andrew “Twiggy” Forrest called on Australians to join his campaign to stop Rio Tinto (ASX:RIO,NYSE:RIO,LSE:RIO) and BHP Billiton’s expansion plans.

His plea got the attention of Hockey, who voiced his sympathy for the iron ore sector. “I have a lot of sympathy for Andrew Forrest and all of the workers in the sector. Markets go up and markets go down. If there is untoward conduct it must be dealt with. We’ve been following this closely,” he said Monday.

On Tuesday afternoon, the Metal Bulletin 62 Percent Iron Ore Index stood at $62.88 per tonne, down $0.14, while the Metal Bulletin 58 Percent Iron Ore Premium Index was at $58.08 per tonne, up $1.41.

Securities Disclosure: I, Kristen Moran, hold no direct investment interest in any company mentioned in this article. 

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