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Budget review sees commodity prices easing

AAP logoAAP 19/12/2016 Prashant Mehra

The federal government has taken a somewhat conservative view on the price forecast for Australia's biggest export earner commodities in its mid year budget review.

Despite a surge since the May budget, Canberra is forecasting iron ore prices to decline from an average $US68 a tonne across the quarters ending March 2017 and June 2017.

Prices are expected to drop to $US55 a tonne in the quarter ending September 2017.

"Liaison with industry indicates that there is very considerable uncertainty around the drivers of the recent price movements, with the only consensus being that current elevated prices are unlikely to be sustained," Treasurer Scott Morrison said in the mid-year economic and fiscal outlook (MYEFO).

In the last federal budget, the government had forecast iron ore prices to average $US55 a tonne over 2016/17, but the steel-making commodity currently trades at $US82 a tonne.

Metallurgical coal prices are forecast to remain at $US200 a tonne through the March 2017 and June 2017 quarters, but then slip to $US120 a tonne in the September and December 2017 quarters.

This compares to the previous forecast for prices to average $US91 a tonne over 2016/17.

Similarly, thermal coal prices are expected to average $US62 per tonne over the next few quarters.

Thermal and metallurgical coal prices have nearly doubled since June following China's decision to reduce output from its inefficient domestic mines.

The recent surge in prices means Australia's terms of trade are forecast to rise 14 per cent in 2016/17 instead of the 1.25 per cent expected in May, but will decline by 3.75 per cent in 2017/18 as commodity prices retrace the gains.

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