Collapsing iron ore prices are set to smash the Western Australian budget. But the premier can’t blame the miners when the state’s forecasts were too high
It’s not often you hear an Australian politician grumbling about increases in mining production, but that is just what the Western Australian premier, Colin Barnett, has been doing of late.
He has accused the two big miners, BHP Billiton and Rio Tinto, of flooding the market with iron ore and thus bringing down the price. The collapsing iron ore prices are set to smash the WA and Australian government’s budgets. But the governments can’t blame the miners when both budgets anticipated much higher iron ore prices than we now have.
As Wayne Swan often found out during his period as treasurer, government budgets are hostage to their forecasts. If the forecasts of various aspects of the economy – whether employment, inflation or the exchange rate – are too optimistic, the end result is often a much reduced level of tax revenue.
Lower iron ore prices affect both state and federal governments. State governments lose revenue from mining royalties whereas the federal government sees its company tax revenue fall (and other taxes if the lower prices result in workers being retrenched).
So the drop in iron ore prices over the past nine months is of concern not just for those who may have shares in BHP, but also government depending on strong iron ore prices to feed their coffers.
As I have noted a few times recently, demand for iron ore from China has weakened and as a result the iron ore price has fallen. But Barnett is saying BHP Billiton and Rio Tinto have increased their supply of iron ore in order to further reduce prices.
He told the Western Australian parliament on 16 October: “The major companies are pushing increasing volumes on a month-to-month basis into the market very conscious that they are contributing to price falls in an already depressed market.”
Except Barnett professed not to being worried about the impact on revenue, but instead the impact on smaller mining companies and employment in the industry.
For the rest of this article, click here: http://www.theguardian.com/business/grogonomics/2014/oct/28/miners-iron-ore-prices-colin-barnett