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Iron, Coal Prices to Halve as Chinese Growth Slumps

January 19, 2009 at 21:06 by Andriy Moraru

Iron, coal prices to halve contract prices for Australia’s iron ore and coking coal exports are forecast to halve. The dour outlook comes from Access Economics, which expects the Australian economy to fall into recession as growth slumps in China. The crisis and the effects on the domestic economy are expected to deepen as commodity prices fall because of reduced global demand.

In its Business Outlook, the Canberra economic agency says the “spectacular fall from grace” of commodity prices will slash tax revenue and cause businesses to shelve investment in infrastructure and project development.
There are concerns that, as mines shut down or reduce capacity, the benefits of the next boom could be missed when the economy and the resource cycle turn.
“We’re amid the largest market meltdown in modern history,” Access says.
“Commodity markets came to this late but they saw the same shocking rout in pricing recently seen in many markets.
“We’ve long thought that commodity prices have had to come back, substantially so.
“We didn’t think the blow-up would come this soon or be quite this spectacular, but blow up it has.”
The Access analysis finds that spot market prices are back to the level of five to six years ago, with current weakness abolishing all of the gains.
The unprecedented rise in commodity prices delivered the Government a revenue windfall of at least $40 billion, causing the surplus to balloon.
As the credit crunch pushes the world into recession, Access forecasts that April contract coking coal and iron ore prices will be halved.
Access’s outlook is more negative than that of Goldman Sachs, which says iron ore prices will be off by up to 30 per cent as demand sours.
“Given what has happened to global steel prices, we expect coking coal and iron ore contract prices to be slaughtered come April, with steaming coal prices to also be hit hard,” Access says.
“It took four or five years for the good news to build on industrial commodity prices. It will take rather less than two years for the bad news to carve a very large and painful chunk from Australian incomes.”
In its broader outlook, Access said it believed mining output would be cut back to 7.8 per cent in the next two financial years but the greatest pain would be felt in the resources labour market.
As the national jobless rate edges up to 4.5 per cent, it is predicted that thousands of mining and resources jobs will be slashed as profits fall..
Access forecasts an 11.4 per cent decline in the number of mining jobs in the next financial year, as mining capacity is cut back.
But Access predicts the jobless figure will then rebound slightly to slow workforce growth of just 1 per cent.
“Mining has been the powerhouse of the Australian economy in recent years, with the income it earned encouraging a rapid lift in investment and firing up a bunch of other sectors,” the agency said.
The negative outlook for the Australian economy is now shared by NAB, which believes a technical recession will be narrowly avoided in the next year.
In a revised outlook, the bank’s economists tipped that the economy would contract by 0.2 per cent in the final quarter of the past calendar year.
NABCapital chief economist Robert Henderson said the prospects for the economy would be grimmer if agriculture did not strengthen after recent rains.
“Our current forecasts for Australia have the economy just missing by a whisker the shorthand recession definition of two quarters of negative growth,” Mr Henderson said.
“The forecasts include a strong contribution from the farm sector as the drought breaks and the rural economy bounces back.
“Under most definitions, Australia’s non-farm economy is in recession now and we will remain there until the middle of the year.”

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