Why has Australia upped its coal and iron ore forecasts?

On Friday, Australia raised price forecasts for its two highest-grossing commodity exports: iron ore and coal. The reason? An unexpected increase in demand from Chinese steelmakers as the country’s construction activity picks up.

Figures released by the Pilbara Ports Authority this week show that iron ore shipments from Australia’s largest loading terminal, Port Hedland, totalled 41.838 million tonnes last month. August saw a record shipment level of 42.875 million tonnes.

As a result, the Department of Industry, Innovation and Science has raised the iron ore price outlook this year by 10 percent — from $44.20 per tonne to $48.50. The coking coal forecast was even brighter, jumping 16 percent from $85.60 a tonne to $99.40.

"Prices for most construction and steel making raw materials continued to grow in the last three months, despite expectations of decline, because of unexpectedly resilient demand from China's construction sector and unforeseen supply disruptions," said Mark Cully, the Department's Chief Economist.

Is it sustainable?
Both of the recently released forecasts are below current market prices. In its new Resources and Energy Quarterly report, the Department of Industry, Innovation and Science cast doubt over whether China’s construction boom is likely to continue.

“Despite a modest drawdown in inventories in the first half of 2016, the residential property market remains oversupplied”, the department recorded in the report. “The housing market has now matured and there is oversupply in the less desirable, smaller and inland cities.”

Regardless of the price of commodities, it appears as though export levels will continue to rise. Two of Australia’s three largest iron ore miners, BHP Billiton and Fortescue Metals Group, are targeting a combined record of 440 million tonnes of exports.

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