future looks bright

Miners quarry Chinese cash
From: By Andrew Trounson and David Uren
May 19, 2006
THE unflagging Chinese economy will boost Australian exports by an extra $3 billion next year after the nation's giant iron ore miners secured a near 20 per cent price rise.

The unexpectedly large windfall helped offset investor anxiety about heavy falls on international stocks and commodities markets.
It will also further swell commonwealth coffers, setting up another strong federal budget surplus that leaves open the possibility of future tax reform.

But it will not do enough to lift Australia out of the red, with the trade deficit continuing to run at about $2 billion a month despite the greatest resources boom in the nation's history.

"It is a very welcome contribution, but it doesn't solve it," ANZ chief economist Saul Eslake said of the iron ore price hike.

Rio Tinto, (rio.ASX:Quote,News) Australia's biggest iron ore miner, said yesterday it had secured from Japanese steel mills a 19 per cent increase in annual prices. It was the second-biggest rise on record, following last year's unprecedented 71.5 per cent increase. BHP Billiton, (bhp.ASX:Quote,News) the world's biggest resources company, is expected to secure the same increase.


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The Japanese settlement will be a bitter disappointment to Beijing, which had been determined to take control of the price talks to reflect its newly won status as the world's biggest iron ore importer, accounting for more than 40 per cent of global imports.

The miners have repeatedly rebuffed China's demand that the price hike be limited to just 10 per cent, leaving it to the Japanese to cave in. The price hike is at the top end of market expectations.

"It is a fantastic price. I think the Chinese will have to capitulate," ABN AMRO resources analyst Rob Clifford said.

The price boost for iron ore could not help insulate shares of BHP and Rio Tinto from the biggest fall on the Australian stock market for seven months.

The plunge followed an overnight fall on US markets, which fear stronger-than-expected inflation figures could point to a rise in interest rates that would dampen economic growth.

The All Ordinaries index fell 95.9 points, or 1.9 per cent, to 5076.2, compounding a miserable week for investors who have been buffeted by a plunge in commodity prices from record levels. BHP fell $1.11, to $29, and Rio Tinto slumped $3.10, to $78.70.

Yesterday's losses brings the market back to its levels in March, when it was rising strongly on the way to last week's record close of 5318 points. Brokers warned there could be more losses today as investors chased safer industrial stocks.

But new ABARE figures show the investment boom in the resources industry is likely to continue for some years yet. The peak federal government commodities forecaster also predicted a significant increase in Australia's iron ore output.

ABARE said iron ore would overtake coking coal as Australia's single biggest commodity export earner in 2006-07, with forecast revenue of $18 billion.

ABARE said 11 projects had firm commitments, costing a total of $7 billion, which would add 100million tonnes a year to Australia's iron ore output.

ABARE said 90 minerals and energy projects, worth a total of $34 billion, were either under construction or had secure funding. This time last year, there were about $23 billion worth of projects planned.

Coal and oil were expected to have the biggest expansion over the next few years, absorbing more than half of total spending. If commodity prices stay high, there are a further 256 projects on the drawing boards, at a potential cost of almost $100 billion.

ABARE chief executive Brian Fisher said skills shortages were holding up some projects. "Project cost pressures and delays are unlikely to ease in the short to medium term," he said