(Bloomberg) -- Australia stuck with a conservative iron ore price forecast in its latest budget update, even as prices surge, setting the country up for a windfall that may bolster its recovery from a pandemic-driven hit to the economy.
The world's biggest iron ore exporter assumes prices will drop to $55 a ton free-on-board by the end of the third quarter of next year, one quarter later than assumed in its October budget. That compares with more than $150 a ton last week, it said in its update, amid surging demand in China and supply problems in Brazil.
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Australia's government has maintained a forecast of iron ore returning to $55 a ton in recent years to avoid falling into the trap of the previous Labor government that lost office in 2013. Its then-treasurer was caught out when the price of Australia's largest export tumbled well below his estimate, turning a forecast budget surplus into a gaping deficit and damaging Labor's economic credibility in the process.
Iron ore has soared over the past month, with benchmark spot prices climbing to a nine-year high, as resurgent Chinese growth coincides with constrained supply. Elevated prices have prompted China's steel industry to call for government intervention, which comes amid escalating, broader trade tensions between the world's second-biggest economy and Australia.
Read: As China-Australia Ties Worsen, Iron Ore Remains Bulletproof
“The government continues to take a prudent approach to its commodity price assumptions in the budget as the global economic outlook remains uncertain,” Treasurer Josh Frydenberg said in a statement. “It is unclear how long Chinese stimulus will persist and when normal production levels will resume in Brazil, which has contributed to iron ore price increases over recent months.”
Movements in the price of iron ore have a big impact on the government's balance sheet. A sustained A$10 ($7.60) rise would boost nominal gross domestic product by A$4.4 billion in the year to June 30, 2021, according to Treasury estimates. Australia's economy emerged from its first recession in almost three decades last quarter, data showed earlier this month.
©2020 Bloomberg L.P.
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