A predicted freefall in iron ore prices could have a significant impact on Australia’s export earnings this year, according to a new report.
In its latest quarterly report, The Bureau of Resources and Energy Economics said it expected benchmark prices of iron ore into China to average about $US94 a tonne in 2014 and 2015, down from an average of $US105 a tonne in June.
Iron ore prices have slumped to a five-year low of below US$80 a tonne as the world's big iron ore miners ramp up supply and the Chinese economy slows down.
The bureau estimated iron ore prices will average between $US90 to $US95 a tonne over the next five years and could average $US86 a tonne in 2019.
The report said further increases in supply indicate that more price falls will be needed to push high cost supply out of the market over the next two years.
"Iron ore suppliers are therefore likely to persist as long as possible, but eventually prices that are substantially lower than high cost supplies from both exporters and domestic producers in China will result in reduced supply," the report said.
The bureau said iron ore volumes were forecast to increase by 13 per cent in 2014-15 because of production from new mines but it predicted earnings would fall by 4 per cent.
As a result, BREE said lower commodity prices because of oversupply and "a persistently high Australian dollar" could hit Australia's earnings this financial year, with a 1 per cent drop expected to $192 billion.
The bureau said earnings from resources exports rose 12 per cent last financial year to $195 billion, driven by more exports of iron ore and a fall in the Australian dollar against the greenback.
And BREE predicted Australia's fortune would rebound over the next five years because of the LNG boom, with export earnings expected to rise to $254 billion in 2018-19 as Australia becomes one of the world's largest LNG producers.
BREE said lower commodity prices in 2013-14 and cost-cutting had seen mining exploration drop by 12 per cent to $6.8 billion, despite a rise in petrol exploration.
Western Australia bore the brunt of the fall in exploration, which dropped 17 per cent to $4.2 billion.
Mining was the key contributor to Australian economic growth last financial year despite the end of the mining investment boom, as mining production ramps up.
The report also said employment in the mining sector had dropped by 2.4 per cent from the March quarter this year to 265,000 people.
WA Treasurer Mike Nahan refused to guarantee a surplus for the state budget this financial year because of the fall in the iron ore price.
The price plunge is a "real worry," he says.
Source: ABC News