Deutsche Bank’s Phil O’Donaghoe believes that China’s economic measures will narrow Australia’s budget deficit as rising iron ore prices flow through to increased tax revenue.
China, which consumes over 76 per cent of the world’s seaborne iron ore, has a direct impact on Australia’s economy as the largest global exporter of the commodity - Australia accounted for 56 per cent of total global seaborne exports in 2023, 82 per cent of which is imported by
China.
O’Donaghoe predicts iron ore will climb from US$106 to US$130 per tonne next year, driven by the GDP stimulus recently announced by Chinese authorities.
In a recent market note, the economist highlighted historical data which shows that iron ore prices typically rise following Chinese stimulus announcements, with a rule of thumb indicating that for every 1 per cent of GDP in Chinese stimulus, the average iron ore price increases by 3.5 per cent in the following year.
“Applying this metric to the 6 per cent of GDP stimulus (DB’s estimate) announced by Chinese authorities a few weeks ago suggests an average iron ore price of US$130/ tonne in 2025, up from the current spot of US$106/tonne,” O’Donaghoe said.
While US$130 may be the upper limit, he remains confident prices will continue to rise, as iron ore prices have never dropped following a major Chinese stimulus.
For Australia, the main impact will be a boost to national income, stronger-than-expected federal government tax revenue, and with that, a stronger-than-expected budget bottom line, he said.
“Delivering a third consecutive budget surplus in 2024–25 will be challenging, but a narrower deficit than the $28.3 billion (1 per cent of GDP) budget estimate looks very feasible,” O’Donaghoe said.
Treasurer Jim Chalmers recently announced that Australia saw an underlying cash surplus of $15.8 billion, or 0.6 per cent of GDP, in the 12 months ending 30 June, instead of the earlier projected $13.9 billion deficit, with economists attributing this positive fiscal outcome partly to fluctuations in iron ore prices.
Namely, at the time of Chalmers' announcement, AMP’s chief economist Shane Oliver said the government has been able to leverage the unexpected rise in iron ore prices to bolster its economic management credentials.
Looking ahead, the government anticipates a likely deficit of $28 billion for this financial year and $43 billion for the following year, having accounted for a decline in iron ore prices in its budget planning.
Speaking to InvestorDaily, Oliver highlighted that the government needs a turnaround akin to 2023–24 to secure a budget surplus.
While he remains optimistic about China’s forthcoming stimulus, unlike O’Donaghoe he anticipates it will primarily stabilise iron ore prices instead of driving them significantly higher.
This expectation, he said, stems from the likelihood that the stimulus will only maintain current growth levels rather than trigger a robust rebound, with a greater focus on consumer spending, which is less reliant on commodities.
“I am optimistic China will come through on the details for a significant stimulus but I think it’s more likely to keep iron ore in a range around current levels than push it a lot higher,” Oliver said.
“That said, the stimulus should help keep the iron ore price tracking above federal government’s budget assumptions albeit the boost to the budget [via stronger mining profits] won’t be as strong as it has been over the last two financial years”
“This probably means a smaller deficit than the May budget’s forecast of $28.3 billion rather than another surplus.”
