Forget the billions that will supposedly flow into miners

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Australia’s large miners are expected to reap the rewards of the commodities new boom for years – which could worth as much as $20 billion in 2018, according to investment bank Macquarie.

If you haven’t already heard, the iron ore price has more than doubled since dipping under US$40 a tonne at the start of this year. Despite losing 4.4% overnight, the metal is still fetching US$77.30 a tonne – or A$103.44 a tonne at the current exchange rate.

Coking coal prices have more than quadrupled to above US$300 a tonne, and thermal coal prices have also gathered steam (excuse the pun!).

But most analysts haven’t upgraded their forecasts for 2018 and beyond according to Macquarie’s head of macro research Jason Todd. “Analysts are still too pessimistic in terms of incorporating where prices are into forecasts beyond 2017,” he says.

Maybe that’s because the current rally in iron ore and coal is not sustainable?

Macquarie analysts reckon earnings for 2018 would need to be increased by around 200% if current spot prices remain at these levels into 2018. “This amounts to more than $20 billion of additional profits for corporate Australia,” says Mr Todd.

And if prices doubled from here, analysts would need to increase their earnings forecasts further too. If they dropped by 50%, then that $20 billion would disappear in a flash.

Unfortunately for Macquarie and resource company shareholders –  current spot prices won’t stay at these levels given both iron ore and coal appear to have been stimulated by one-off factors rather than sustainable supply and demand factors.

Chinese government stimulation for its economy including the steel industry came despite Chinese officials previously stating that they weren’t going to introduce stimulus. China recently said it expects to spend an extra US$36 billion on rail links across Beijing. That’s just one city, illustrating how much stimulus may be going on – but it’s unlikely to last for years.

That means BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO), Fortescue Metals Group Limited (ASX: FMG) as well as coal miners Whitehaven Coal Ltd (ASX: WHC) and New Hope Corporation Ltd (ASX: NHC) are unlikely to see much of the $20 billion in supposed ‘extra’ earnings.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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