Red-hot coal deals add more fuel to the economic fire


Tim Colebatch, The Age



AUSTRALIA’S economic prospects have taken another unexpected turn.

Economists estimate that last week’s deals with steel makers Posco and Nippon Steel to treble the price of coking coal will lift national income in the year ahead by at least $30 billion, or 3%.

While each day brings more evidence that economic activity is slowing rapidly, the 210% rise in prices negotiated by the BHP Billiton Mitsubishi Alliance in deals with the steel makers suggests a powerful force will be pushing it ahead.

While senior Reserve Bank and Treasury officials forecast last month that Australia was heading for a boost of 10% to 15% in the terms of trade in 2008-09, the Posco deal suggests the rise could be more like 20% to 25%. Next year could see the terms of trade — the ratio of export prices to import prices — overtake the record levels of the Korean War boom in 1951.

That boom and bust pitched Australia into recession. But the economy now has a much broader base.

With the global financial crisis and higher interest rates pushing hard on the economic brakes, and soaring mineral prices pushing equally hard on the accelerator, the relative strength of the two forces will determine what happens to the economy over the coming year.

ANZ senior economist Katie Dean said if the bullish assumptions behind the coking coal deals flowed into negotiations for steaming coal and iron ore contracts, Australia was set to experience another steep rise in its income in 2008-09.

"It’s going to add about $30 billion to the size of the economy," she said. "It’s a huge development, and it shows what the Reserve Bank is up against in trying to slow the economy. They can’t control what is happening in these markets."

ABN Amro chief economist Kieran Davies said the income boost could be more like 4% of gross domestic product — including a windfall of more than $10 billion in company tax revenue for the Federal Government.

"This should provide an immense boost to the resource-rich states, but the broader boost should be less than usual if the Government saves the windfall," he said.

"This suggests that the strengthening of the resources boom, while much greater than first thought, could have a less pronounced impact on the economy (outside the resource-rich states) than past commodity price rises."

Leave a Comment

You must be logged in to post a comment.

This site uses Akismet to reduce spam. Learn how your comment data is processed.