$1.7b hole as ore price dives
Update 9AM: The State Budget faces a $1.7 billion hole that could last years after a collapse in iron ore prices amid signs they could fall further.
And the hole grew larger overnight with the iron ore spot price dropping a further $US1.20 to $US84.50.
The sharp fall in the spot price for iron ore is increasingly bad for Federal Treasurer Joe Hockey because it eats into mining company profits.
The price for WA's most important export has fallen 10.6 per cent in a month to its lowest since September 6, 2009. Every dollar fall in the average iron ore price costs the State Budget $49 million in lost revenue.
The Budget forecast iron ore to average $US122.70 a tonne through 2014-15 and at current trends, this would have to exceed $US140 for the rest of the year to meet the forecast.
If the price fails to rebound, even strong exports would leave royalty income up to $1.7 billion short of the May Budget forecast.
WA Treasurer Mike Nahan has already signalled that without an iron ore turnaround, he would have to look at more Budget cuts.
Ratings agency Moody's, in downgrading WA's economy to Aa1 last month, highlighted the risks in optimistic iron ore forecasts.
Dr Nahan said the fall in iron ore prices would reverberate for years.
He said the State got a raw GST deal from Canberra and a fall in royalties would not be compensated through the GST for at least three years. These factors coupled with the dollar's high exchange rate meant WA would need "corrective measures" in the mid-year review.
It is not just the State Budget in trouble.
The Bureau of Resources and Energy Economics, which gives Canberra key forecasts, had expected iron ore to average $US104 a tonne this year before falling to $US97 in 2015.
ANZ commodities analyst Mark Pervan said the latest fall in prices was partly because of problems in China's steel industry, which threatens mainly small to medium mills. There were also concerns about demand in China as the property market cooled and supplies from Australia and Brazil rose sharply.
Port Hedland had record shipments to China last month. Total shipments were 32 million tonnes in August, 43 per cent more than in August last year.
Most miners expect a recovery but some analysts tip a price of $US75 a tonne next year and others fear it could fall much further.
