One-time economic engine of Australia in deficit as iron ore sinks

[SYDNEY] Western Australia state, once the "economic engine" of Australia, on Monday recorded its first budget deficit in 15 years as royalties from iron ore plummet.

Western Australia treasurer Mike Nahan said the A$1.28 billion (US$1.04 billion) budget deficit stemmed from a fall of more than 40 per cent in the iron ore price leading to a A$7.1 billion drop in royalty revenues.

A deficit of A$907 million is forecast for next year, with analysts doubtful of any turnaround in ore prices soon.

The price of iron ore has fallen as a huge increase in Western Australia's output created a glut of the mineral.

Treasurer Nahan also blamed lower crude oil prices for the deficit as royalties from the state's massive exports of natural gas slumped. Crude oil prices have fallen by about 35 per cent since the budget was finalised.

A mining frenzy spurred by a voracious appetite among Chinese steel mills for rich Australian ores had miners scrambling to fill orders.

Iron ore still accounts for 56 per cent of the state's exports.

In the boom years, multinationals BHP Billiton and Rio Tinto spent billions of dollars digging new mines.

More recently, State Premier Colin Barnett urged the two companies to rethink their expansion strategies in light of the soft market.

Supply-side discipline from high cost producers will be the key driver for any price recovery, according to Mark Pervan, head of industry economics and research for ANZ. "To date, this hasn't been apparent, but mounting losses suggest many will be forced to cut output by the second half of 2015," Pervan said in a note to clients.

The Pilbara Ports Authority, which handles about a fifth of the world's seaborne iron ore trade, said on Monday it would hold shipping rates at current levels until at least July 1, 2016 in response to low commodity prices.

Barnett said on Friday that miners could be eligible for a 50 per cent rebate in iron ore royalties if the price stays below an average of US$90.

Pervan forecasts an average iron ore price of US$80 a tonne next year.

The latest deficit may increase Western Australia's projected state debt to more than the A$27.5 billion seen in May's state budget.

Moody's cut Western Australia's AAA credit rating to Aa1 in August, citing the deficit blowout, following a similar move by Standard and Poor's last year.

REUTERS