(The opinions expressed here are those of the author, a columnist for Reuters.)
By Clyde Russell
LAUNCESTON, Australia, May 14 (Reuters) - Many Australians will castigate the country’s new conservative government for a tough first budget that saw cuts to welfare and hikes to taxes, but some of the blame lies with China.
Just as China’s rapid growth of the past decade fuelled a commodity boom in Australia, the slowing of the Chinese economy and its uncomfortable transition to a more consumer-led model means the end of the resource bonanza down under.
While the headlines from the Liberal/National coalition’s federal budget on Tuesday focused on Treasurer Joe Hockey’s cuts to family payments and health, and tax increases for the wealthy, much of the underlying story was contained in the economic forecasts.
Australia’s two biggest export earners are iron ore and coal, and they will be joined by liquefied natural gas (LNG) once the seven projects currently under construction are operating. The last is slated to come onstream by 2018.
China is Australia’s biggest trading partner, accounting for about 36.7 percent of exports.
The government’s budget papers paint a picture of muted prices for these commodities, which will impact on the collection of royalties and taxes.
Thermal coal prices are expected to be A$81.24 ($76.17) a tonne in the September quarter, falling to A$79.74 for the period up until the end of June 2016.
This is in contrast to prices above A$100 a tonne that prevailed in the 2011/12 fiscal year and the A$162.80 from the December quarter of 2008.
The current Newcastle spot price is $73.49 (A$78.41) a tonne, close to a four 1/2 year low, meaning the government isn’t expecting a rebound in coal prices any time soon, perhaps a realistic assessment given the global supply surplus and China’s efforts to reduce the use of the fuel as part of pollution control measures.
It’s a similar story for metallurgical coal, which is forecast to be A$126.11 a tonne in the fourth quarter of 2014, rising to A$131.29 by the June quarter of 2016.
Again this forecast is realistic given the current price of the steel-making fuel of about $115 (A$122.70) a tonne, but it is also a far cry from the glory days of the commodity boom, when coking coal fetched prices above A$300 in late 2008 and early 2009.
Iron ore prices are forecast by the government to fetch A$95.04 a tonne in the December quarter this year, dropping to A$87.11 by June 2016.
Given the wave of new supply hitting the market in the next few years, creating an expected surplus just as Chinese construction slows, this is a realistic assessment.
The budget papers also show how investment in resource projects is falling off a cliff, with spending on major projects dropping from A$66.16 billion in 2013/14 to just A$11.77 billion by 2016/17.
It’s this investment boom that has been the real driver of Australia’s economic success, helping the country weather the 2008 global recession better than most developed nations.
However, as in past commodity cycles, global over-investment in new projects means that even if China’s economy continues to grow at close to 7 percent a year, there will still be an excess of supply.
The Australian government is working on the assumption that economic growth will be able to rotate away from resource investment toward other sectors, such as housing construction.
In this way it’s hoping that the country’s economic growth streak of 23 years can continue, but what is clear is that the fat provided by the resource boom of the past decade is largely gone.
The Labor Party government from 2007 to 2013 and its Liberal predecessor largely spent the proceeds of the boom on cutting taxes and boosting welfare.
Now that it’s over, it makes sense that the government has to tighten its belt, and that of the nation as well. Of course, it would have been better for the previous governments to realise the good times wouldn’t last forever, but pots of money and politicians rarely make for sensible decisions.
Editing by Richard Pullin