Thursday, 29 July 10
GOVT TOO OPTIMISTIC ON IRON, COAL PRICE

Federal government forecasts of continued strength in iron ore and coal prices, which underpin revenue expectations for the proposed new mining tax, are too optimistic, analysts say The forecasts underpin the government's expectation of $10.5 billion in revenue from the proposed Mineral Resources Rent Tax over the first two years of its implementation from 2012/13.

Gavin Wendt, senior resources analyst for research firm Mine Life Pty Ltd, said the outlook for thermal coal prices was positive but there was a potential for iron ore prices to fall.

Mr Wendt said government forecasts of decades of iron ore and coal sector growth were "wildly optimistic".

"That's the problem with the tax."

While demand continued to grow for thermal coal, which is used in power generation and is in short supply, the coking coal price was tied to the iron ore price due to its role in steelmaking.

Mr Wendt said demand for iron ore was still very strong but supply was starting to catch up as existing mines expanded and new mines opened to take advantage of several years of high prices.

"I'm still very bullish on demand for iron ore ... which will remain strong because steel production will remain strong," he said.

"But there's no shortage of iron ore.

"It's just a matter of how quickly operations get developed.

"Pricing is probably close to its peak, which means we're slowly starting to see the price tail off.

"The bottom is not going to fall out of the iron ore market but the government is being optimistic when it suits them."

Research and consulting firm Wood Mackenzie says the government won't get any additional revenue from coal if prices fall to levels seen just a few years ago.

The  government is expected to fund a one per cent reduction in the corporate tax rate with revenue from the new mining tax, reported by

If coal prices remain strong, coal miners will pay an additional $7.4 billion, or eight per cent in government take over the first five years of the tax, Wood Mackenzie head of coal supply research Gero Farruggio said.

Mr Farruggio said coal miners were already battling strong cost inflation and falling productivity.

"Traditionally Australia is viewed as a low-cost exporter, but in our 2010 global thermal coal export cash cost (of production) rankings it is well down the table in sixth place," he said.

"Indonesia dominates the ranking tables with the largest thermal coal production and lowest average cash cost.

"In contrast to Australia, it (Indonesia) has moved to reduce the level of government take from coal production."
Source: Nine Msn / Hellenic Shipping

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