$4.4bn windfall scrapped amid China spat
Record Chinese demand for iron ore driving up prices for Australian exporters will barely register in conservative new budget figures, with the government opting not to factor in a $4.4 billion potential windfall amid the pandemic and rocky relations with China.
As the world's largest iron producer, Australia has benefited significantly from a sharp spike in prices in recent weeks.
But the federal government has toned down assumptions in the Mid Year Economic and Fiscal Outlook forecasts released on Thursday.
Last week, the iron ore price topped US$150 per tonne free on board (FOB) for the first time in almost seven years.
The government assumed iron ore prices would decline to $US55 per tonne FOB by the September quarter 2021, one quarter later than forecast in the October budget.
China's stimulus measures have underpinned the spike, after pushing monthly steel production to record levels. China imports roughly 60 per cent of its iron ore from Australia and is heavily dependent on the commodity.
But Treasurer Josh Frydenberg has moved to manage expectations, saying it was "unclear" how long China's stimulus would last.
Treasury estimated a sustained rise of $10 in the iron ore price would boost the budget by $300 million and nominal GDP by $4.4b. But the government has opted against factoring in that potential windfall.
"The government continues to take a prudent approach to its commodity price assumptions in the budget as the global economic outlook remains uncertain," Mr Frydenberg said.
"In the face of a one-in-a-century health and economic shock, Australia remains among one of the best performing developed nations in the world, supported by our resilient economy and world-leading resources sector."
Australia's exports have been hit lately by the pandemic and an escalating trade war with China that has seen beef, barley, wine and other industries affected.
Trade Minister Simon Birmingham has referred the barley matter to the World Trade Organisation (WTO), while Prime Miniister Scott Morrison has said a rumoured ban on coal exports, if confirmed officially, "would obviously be in breach of WTO rules".
Uncertainty over Brazil's iron ore recovery has also contributed to the adjustment.
Brazil is the world's second largest iron ore producer but has struggled to reach its normal production levels after disruptions at its largest mining company.
Brazilian mining giant Vale was forced to halt operations at 10 sites after a deadly disaster in January 2019.
The announcement came as Mr Frydenberg prepared to deliver the MYEFO on Thursday, which is set to reveal an improvement to the budget bottom line.
The government was buoyed by a surprise 3.3 per cent rise in GDP for the September quarter, painting a rosier picture than first feared at the height of the pandemic.
Originally published as $4.4bn windfall scrapped amid China spat