Spike in commodity prices eases Aussies’ rating worries

SYDNEY: An odd mix of policy action in China and policy failure at home is proving an unlikely tonic for Australia’s growing budget deficit, perhaps even enough to forestall a near-term downgrade of the country’s pristine AAA credit rating.

The conservative government of Malcolm Turnbull has been scrambling to placate ratings agency S&P Global Ratings since it changed Australia’s outlook to negative in July, promising tighter control on the budget, particularly spending.

It has also had some significant luck: Beijing’s drive to clean China’s skies and shutter inefficient mines has sent prices of some of Australia’s main commodity exports surging.

Spot prices for Australian hard coking coal; have jumped 230% this year to top US$258 (RM1,080) a tonne. That is a huge windfall for Australia where coal accounts for a tenth of exports at around A$2.8 billion (RM8.8 billion) every month.

At first it was thought the spike would be temporary.

Indeed, the government is reluctant to incorporate the rises into its mid-year budget review due in December. Yet there are signs the resurgence has legs.

Japanese steel makers have already agreed to double the price of coking coal for the fourth quarter to US$200 a tonne.

Last week, Glencore won an increase of nearly 50% in prices for thermal coal to Japan, a contract that covers an entire year.

And it’s not just coal. Prices for iron ore, the country’s biggest export earner, have topped US$64 a tonne compared to a trough last December of US$37.

Asian spot prices for liquefied natural gas, another major earner, are up over 50% from lows touched in April, again courtesy of rising demand from China.

As a result, Australian export prices jumped 3.5% in the third quarter, the steepest gain in five years, and an even bigger increase is likely this quarter. That will lift national income, company profits and, crucially for the government, the tax take.

Scott Haslem, an economist at UBS, estimates a 10% rise in non-rural commodity prices benefits the budget by A$2.2 billion initially, rising to A$5.4 billion after one year.

“At face value, the coal price spike should be positive for the budget, across Federal and State governments,” said Haslem.

“We think the budget deficits should finally at least avoid slippage, reducing the near-term worry over the AAA rating.” – Reuters