Stephen Koukoulas - Commodity Prices
A quiet week for local data, so the focus will be overseas.
One vital factor for the Australian economy is commodity prices. These have been choppy in recent months, they remain higher than they were at the start of 2016, but are still well below the boom levels of 3 to 5 years ago.
Global economic growth in general, but Chinese growth in particular, are drivers of the commodity price cycle. On that score, conditions remain generally positive notwithstanding some softer economic data in recent weeks. As the budget papers show, not only is the economy and national income importantly driven by the commodity price cycle, but the bottom line budget balance is highly influenced by price changes.
One snippet buried in the budget papers was the importance of iron ore. A US$1 a tonne change in the iron ore price impacts the budget bottom line by $420 million a year. At US$100 a tonne, the budget would be swimming in surplus cash. A drop to US$35 a tonne will see the surplus forecast pushed back another year or two or three.
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