Recently, Australia-China relations have deteriorated further, with Chinese importers hoarding large quantities of iron ore for fear of the impact on imports, causing iron ore futures to hit a new record of $226 per ton on Monday (10). Australia has benefited greatly from this, with a $20 billion increase in the budget, a drop in unemployment and a significant boost to the economy.
Based on relatively conservative assumptions, the Australian federal budget estimated the price of iron ore at $55 per tonne. According to estimates by the country’s Treasury, every $10 increase in the price of iron ore increases national tax revenues by $2 billion. In the past year, the price of iron ore has actually risen from $100 to more than $200 per ton, which would result in an increase of more than $20 billion to the federal budget.
At a time when relations between Australia and China have deteriorated sharply, Australia’s biggest export has led the way in tax increases that add twice as much value as the federal government spends on child care each year.
Australia’s policymakers appear determined to avoid the mistakes of the past, when excessively tight fiscal and monetary policies in the mid-2010s dampened economic growth, and to keep economic policy relatively loose in the years ahead, according to analysis by Andrew Boak, chief economist for Australia at Goldman Sachs Group Inc.
Economists predict that Australia’s economy will grow at a rate of 4.1 percent through June 2022, then decelerate to 3 percent in the year after. They expect the unemployment rate to fall to 4.5 percent by June 2023.
Iron ore is an important raw material for making steel and is a key component of the construction industry that is spurring China’s economic recovery. Australia supplies 2/3 of China’s iron ore. The continued high price of iron ore is now a political threat to the Chinese Communist Party, and the Financial Stability Development Committee of the Communist Party’s State Council is actively seeking ways to stabilize the price of iron ore and diversify imports.
Simon Thompson, chairman of Rio Tinto, one of the world’s top three iron ore producers based in London, said it is still difficult for China to find alternative options for iron ore outside of Australia.
Figures released by the Communist Party’s General Administration of Customs on Friday (7) for April showed iron ore imports hit a 10-year high. Chinese steel futures also rose to new highs. This suggests that China’s demand for iron ore will remain strong for some time to come.
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