Western Australia's economy should recover quickly, thanks to a strong iron ore price

Jul 16, 2020

By Michelle Stanley

Western Australia's economy should recover from the economic hit of COVID-19 quicker than other states, thanks to a stronger than expected price of iron ore, analysts believe.

Key points:

  • The iron ore price has so far sat above $US100 per tonne in the 2020/21 financial year
  • For every $US1/t the price sits above $US65/t, there is an $80 million benefit to the WA budget bottom line
  • Increased dividends and wage growth in the mining sector could be seen as a result

Increasing demand from China and supply issues in Brazil have seen the iron ore price sit well above forecasted expectations, today above $US112 per tonne.

"It's beyond expectations that anyone would've had going back six months or so," Deloitte Access Economics partner Noel Richards said.

The price has not dipped below $US100/t so far in the 2020/21 financial year.

But with expectations of a balancing-out of supply and demand in the market, in December last year the WA Government updated its pricing forecast of the commodity down to an average $US65/t in over three years.

"The state budget is very sensitive to commodity prices, and to iron ore prices in particular," Mr Richards said.

"The price being much, much higher than [$US65/t], it's obviously going to deliver some really significant gains to the budget bottom line."

A man holds a piece of iron ore in front of a remote-controlled truck in Sheila Valley, WA.

The average total cash cost of WA's iron ore exports in 2019 was $US29.6/t, according to the Government.(Reuters: David Gray)

After the COVID-19 shutdown and associated economic impacts, Mr Richards said the strong iron ore price and extra revenue would be "very welcome".

"The State Government is having to put a lot of money on the line to support economic growth amidst COVID-19 and many of its other revenue streams, for example property taxes, payroll taxes, will definitely be affected," he said.

"So to have one revenue stream and royalties really supporting and growing the budget bottom line is very welcome, and that's important for the economy because the State Government does have an important role to play in continuing to support economic growth in Western Australia.

Further benefits to investors, workers, and mining communities could also be expected as a result of the "significant profits", according to Mr Richards.

"[The mining companies] will obviously be paying some large dividends to their shareholders, we expect, reflecting the earnings that they're making," he said.

Mining trucks lined up at dawn

Mining companies are expected to potentially "pull the trigger" on new investments and wages growth.(ABC Open Contributor Greens_pics)

But the "critical question" around the economic benefit from this boost, Mr Richards believed, was potential actions by the mining companies.

The average cash cost of Western Australia's iron ore exports in 2019 was US$29.6/t, according to the Department of Jobs, Tourism, Science and Innovation.

"Whether the miners believe these price gains are sustainable and therefore pull the trigger on some projects is really the critical question," Mr Richards said.

"That's where we could see some bigger projects being unlocked, and that obviously creates a lot of activity through the economy in new jobs, spending that flows through the economy.

"Wages growth is the other one of how it might affect the real economy — obviously BHP and Rio have very large employment bases in Western Australia.

Where the State Government invests its money over the next few months to encourage economic growth around the state would be the deciding factor on how quickly the economy recovers, Mr Richards said.

"Putting in the right areas of reform, of investments and projects, is really important to get activity going again," he said.

"So if we can get that right, then these gains we're getting through the royalty streams could help that recovery a little bit faster."

The post about “Western Australia's economy should recover quickly, thanks to a strong iron ore price" first appeared on the ABC Net website.

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