2012-13 Government Mid-year Financial Projections Statement

2012-13 Government Mid-year Financial Projections StatementThis phenomenon has persisted despite recent declines in iron ore prices, and is likelyto continue in the medium term given a US dollar weakened by quantitative easing,and a euro currency weakened by sovereign debt concerns in the euro area.These factors are likely to persist for a number of years, as is the divergence of theexchange rate movements from commodity price changes.$US Iron Ore PriceThe iron ore price paid to domestic producers – proxied by an estimated quarterlyeffective price – is assumed to be set on a quarterly basis, at the level of the averagespot price in the previous quarter (lagged by a month) and adjusted for grade, moistureand freight rates. The effective price is projected to linearly return to a long-runaverage price currently forecast at $US85/tonne (determined by taking into account anumber of analysts’ price estimates reported by Consensus Economics).At budget-time, the quarterly effective price was assumed to revert to the long-runaverage in the final month of the budget outyear (i.e. June 2016). However, given thecurrent dynamics in the iron ore market, the iron ore price is now expected to settlearound its long-run average level over the next 8-10 years – which is more consistentwith the expected time for iron ore supply and demand (especially from China) tobalance. This profile is also consistent with Consensus Economics’ definition of‘long-run’. In this mid-year review, the prevailing quarterly effective price is stillassumed to revert to the long-run average price of $US85/tonne but over a period of10 years (i.e. a period that spans the average duration of the business cycle).The following table highlights that the revenue impact of these changes in forecastingassumptions is a net reduction of $194 million over the budget period. This isrelatively immaterial when compared to total iron ore royalty revenue of $18.6 billionover the same period. It results in iron ore price and exchange rate assumptions at theend of the forward estimates that are intuitively more plausible.ESTIMATED ROYALTY IMPACTS OF METHODOLOGY CHANGESTable 2As at 10 December 2012Iron ore (fines) $US/t Assumptions 2012-13 2013-14 2014-15 2015-16 Sum2012-13 MYR - Previous Methodology 118.4 107.2 99.9 92.62012-13 MYR - New Methodology 118.4 109.8 107.2 104.5Variance ($US/t) - 2.5 7.2 11.9Revenue Impact ($m) - 107.2 356.2 677.9 1,141.4Exchange rate ($US/$A) Assumptions 2012-13 2013-14 2014-15 2015-16 Sum2012-13 MYR - Previous Methodology 104.0 99.7 91.7 83.72012-13 MYR - New Methodology 103.4 101.0 98.2 95.4Variance (US cents) -0.5 1.3 6.5 11.7Revenue Impact ($m) 26.1 -77.5 -430.4 -853.1 -1,334.9Total Revenue Impact ($m) 26.1 29.6 -74.2 -175.1 -193.5Source: Department of Treasury and Department of Mines and Petroleum.60