Securities sold by Australia’s biggest state by area have returned 5.1 percent since Dec. 31, compared with 6.3 percent for an index of the nation’s provincial notes, according to Bank of America Merrill Lynch. The price of iron ore, the state’s largest export, has slumped 30 percent to $93.40 a metric ton over the same period and entered a bear market, forcing miners in the remote Pilbara region to cut spending and jobs.
While Western Australia has based its spending plans on iron ore staying at an average $122.70 a ton this fiscal year, analysts surveyed by Bloomberg predict the steelmaking material will hold closer to current levels through 2018. The state’s operating surplus for the current period was forecast at just A$175 million ($163 million) and the iron-ore plunge means inflows could be trailing estimates, according to revenue sensitivities provided in the May budget.
“The big picture is what it does to net state debt,” said Alan Langford, chief economist at Bankwest, a Perth-based unit of the nation’s largest lender Commonwealth Bank of Australia. “It has a good capacity to service that debt if the iron-ore price stays high, but not so much if it wobbles. It is really putting a big hole in the state government’s royalty revenue.”
The budget estimates total revenue of A$28.7 billion this fiscal year through June 30, 2015, with resource royalties making up 22 percent of that. Every $1 per ton fall in price cuts annual royalties by A$49 million, according to the budget.
More than a third of the world’s seaborne iron ore comes from Western Australia, which at 2.6 million square kilometers (1 million square miles) is over three times the size of Texas. Rio Tinto Group, BHP Billiton Ltd. and Fortescue Metals Group Ltd. operate mines in the Pilbara, a dry 502,000 square kilometer region that’s home to about 50,000 people.
Banks from Goldman Sachs Group Inc. to Deutsche Bank AG and Morgan Stanley see iron-ore prices falling through 2016 spurred by an accelerating global supply glut and slower Chinese growth. Ore with 62 percent iron content delivered to China’s port of Tianjin has sunk from as high as $158.90 last year and touched $89 on June 16, the lowest since September 2012.
While Goldman is forecasting the average price will drop to $80 a metric ton in 2015 from $106 this year, not all analysts are so bearish. Sanford C. Bernstein Ltd. on July 9 predicted a dramatic recovery in prices in the second half, saying that it’s now cheaper for steel mills in China to buy seaborne rather than domestic supply. Citigroup Inc. said in June a rally was likely.
Lower prices may put further pressure on Western Australia’s credit rating, which was cut one level to AA+ by S&P in September. It would be “very difficult” for the government to restore its top grade if iron-ore prices remain soft, and it may require asset sales to do so, Bankwest’s Langford said in an Aug. 11 phone interview from Perth. While Moody’s Investors Service maintains a Aaa score, its outlook is negative.
Bonds from Tasmania, the smallest state and more lowly rated than Western Australia by Moody’s, are the second-worst performers, returning 5.3 percent through Aug. 15, according to Bank of America Merrill Lynch. Notes issued by Victoria, which has unblemished AAA ratings, gained 7 percent, the most among the states, the data show. Federal notes are up 6 percent.
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