Iron ore prices are expected to remain higher for longer according to Treasury consultation that says Chinese hunger for Australia’s most valuable export will counter improved supply from Brazil.

Bulk metal prices have remained elevated during the coronavirus pandemic thanks to strong Chinese demand and supply issues that have hamstrung virus-stricken export rival Brazil.

Improved production in the South American nation is expected to bring down the price of iron ore in the coming months but consultation by Treasury – contained in Tuesday’s federal budget papers – suggests the price decline is not as sharp as initially feared.Play Video

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The pace at which iron ore prices decline remains a key uncertainty for nominal GDP – with federal budget analysis suggesting a $47 billion variance between the best and worse case scenarios by the end of June.

The free-on-board iron ore price is now assumed to decline to $US55 per tonne by the end of the June quarter 2021, two quarters later than was assumed in Treasurer Josh Frydenberg’s July update.

“[The consultation] highlighted a relatively common view that, while supply issues from Brazil are easing slightly, in the near term global supply is not expected to recover rapidly and Chinese stimulus is expected to sustain demand,” the budget papers read.

“Some market and industry participants have highlighted a risk that iron ore prices could remain high for an even longer period of time.”

Sensitivity analysis provided by Treasury shows if the iron ore price was to fall immediately to $US55 per tonne free-on-board, rather than by the end of the June quarter 2021 as assumed, nominal GDP could be around $24.8 billion lower than forecast in 2020-21 and $0.6 billion lower in 2021-22.

“This would result in a decrease in tax receipts of around $2.6 billion in 2020-21 and, due to the timing of company tax collections, a decrease of around $3.7 billion in 2021-22,” the budget papers say.

By contrast, if the iron ore price was to remain elevated until the end of the June quarter 2021, before falling immediately to US$55 per tonne FOB, nominal GDP could be around $22.9 billion higher than forecast in 2020-21 and $2.9 billion higher in 2021-22.”

“This would result in an increase in tax receipts of around $1.3 billion in 2020-21 and, due to the timing of company tax collections, an increase in tax receipts of around $4.8 billion in 2021-22.”

Australia’s terms of trade are forecast to drop by 1.5 per cent in 2020-21 and by 10.75 per cent in 2021-22, broadly in line with the technical assumption that prices of iron ore will not be maintained at recently elevated levels.

Total exports are forecast to fall by 9 per cent in 2020-21 and grow by 2 per cent in 2021-22, though mining exports are expected to grow by 0.5 per cent in 2020-21 and 4 per cent in 2021-22.

In the near term, coal export volumes are expected to be subdued due to lower global demand.