Spike in com­mod­ity prices eases Aussies’ rat­ing wor­ries

The Sun (Malaysia) - - SUNBIZ -

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

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