Treasurer admits boom is over

Has the two-speed economy dropped into neutral?

Federal Treasurer Wayne Swan has admitted to The Australian that commodity prices have peaked.

The newly implemented Mining Resource Rent Tax (MRRT) was expected to deliver $3 billion in income, and may not even reach half that, according to the newspaper, which suggests the Commonwealth government’s planned surplus this year has become more unlikely.

Macquarie Group analysts have put the budget shortfall at $10 billion based on the deterioration of commodity prices alone.

In 2008, Swan refused to admit the GFC would push the budget into deficit until after the mid-year budget update. But it’s not just the Federal government that thought the boom would last. Most of the state governments assumed the flows of revenues from mining company taxes and royalties would continue.

We’ve already seen that’s not the case with our two biggest miners, BHP Billiton (ASX: BHP) and Rio Tinto Limited (ASX: RIO) both reporting falling revenues this year. And they weren’t the only ones.

Queensland appears to have made the highly optimistic estimate that coking coal prices will average US$200 a tonne this year, and have based their budget on an increased royalty rate on prices that miners are not likely going to get. Reuters recently reported that BHP had taken a 24% haircut on prices it receives for coking coal shipped to Japan, to US$170 a tonne.

QR National’s (ASX: QRN) chief executive, Lance Hockridge also may have underestimated the price falls, stating in August that he was optimistic about China’s demand for commodities. The company makes most of its money charging miners to carry their coal and iron from mines in Queensland to ports on the coast, but is reliant on volumes to turn a profit.

Some coal miners are already starting to cut back production, while BHP and Rio have recently closed coal mines, and downsized operations, Australia’s largest listed coal miner, Yancoal Australia (ASX: YAL) has halted its expansion plans and was seeking cost cuts.

The Foolish bottom line

The fall in iron ore and coal prices is likely to have a broad reaching effect on Australia’s economy, and not just on the mining companies. As an integral part of our economy, many other sectors have become reliant on the resources industry. It appears that our two-speed economy may have just dropped into neutral.

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Motley Fool writer/analyst Mike King owns shares in BHP. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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