High prices for exports such as coking coal will boost the country’s terms of trade but global coal production has peaked and prices are unlikely to stay high

This article is more than 3 years old

This article is more than 3 years old

​The rally in the price of key exports such as coal and iron ore that has promised a multibillion-dollar windfall for Australia’s treasurer, Scott Morrison, could be shortlived, economists have warned.

Hopes have risen that the federal budget could benefit from as much as $23bn in additional tax revenues from exports, thanks to higher prices, especially for coal which has more than doubled in price in the past four months.

But Australia remains at the mercy of trends in its biggest markets China and India, and economists say it’s not clear how long the rally in commodity prices will last.

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Tim Buckley, from the Institute for Energy Economics and Financial Analysis, said global demand for coal was expected to fall 2.7% in 2016 despite recent spikes in demand following surprise cuts in production in China and India​, the world’s two biggest importers.

China curbed domestic coal production at the same time hydro production was falling 13% in September, pushing up reliance on coal imports. India, meanwhile, was also forced to curb production when its coal inventories spiked to 88m tonnes.

“The price has overshot,” Buckley said. “Both big importers had aberrations in September so it has pushed the price back up.” ​

China on Friday recorded its first rise in factory-gate prices in four years.



Economists at NAB agreed with Buckley, saying ​ the unexpectedly high settlement price for coking coal – which is used to make steel – would “provide a boost to Australia’s terms of trade, nominal GDP and government revenues”.



The bank’s chief economist, Alan Ostler, said the higher coking-coal price alone could add $12.5bn to the federal budget in the next two years and help ease the current budget shortfall of $37bn, or 2.2% of gross domestic product (GDP).

The federal budget deficit came in $1.33bn under its end-of-August forecast thanks to stronger revenues and lower spending, figures released on Friday showed. ​The budgets of states such as Queensland and New South Wales will also benefit hugely from increased royalty taxes.

But the longer-term reality was likely to be different, Ostler said, and the rise in prices was “unlikely to be sustained”. The bank also believes the iron ore price will fall back from its current level of just over $55.94 a tonne – just over Morrison’s budget forecast – to $44 a tonne in 2017.

Global coal production peaked in 2014, Buckley said, and action on setting a carbon price following agreement on the Paris climate accord could continue to suppress demand.

Despite the hopes of the federal resources minister, Josh Frydenberg, that India would provide a burgeoning market for Australian coal even if the current number-one market of China slows, Buckley said India’s energy minister, Piyush Goyal, had vowed to cease all coal imports within three years.

Many doubt the prediction but Buckley said: “I think he’ll do it. The cost of new solar power is less than the cost of new coal – 4.5 rupees per kilowatt hour (US$0.67) compared with 6 rupees for imported coal.

“Solar has dropped in price way faster than anyone said it would. It is 40% cheaper than it was 18 months ago.” ​