Western Australia is set for a $260 million windfall from iron ore royalties after one of the state’s major producers, Rio Tinto, negotiated a 71 per cent price increase from a Japanese customer.
Hamersley Iron said last week it had negotiated prices with Nippon Steel for deliveries of lump, fine and Yandi iron ore for the contract year commencing April 1.
However, the final size of the state’s royalty share still remains dependent on Australia’s other major producer, BHP Billiton, realising the same price increases.
But analysts say it would be highly unlikely if BHPB did not achieve similar increases.
The world’s largest iron ore producer, Brazilian-based CRVD, also locked in 71 per cent prices with Asian steel makers.
In fact, $260 million could be a cautious prediction, given both Australian producers are dramatically increasing production to meet huge Asian steel demand, particularly from China.
This fiscal year BHPB and Rio Tinto are expected to produce a combined total of 230 million tonnes, the lion’s share of state production, worth almost $400 million in royalties.
This figure compares with the $305 million in royalties the state secured from total iron ore production in 2003-2004 from 202mt of iron ore produced (worth $5.5 billion).
In the 2005-2006 fiscal year the Government expects to earn $423 million in royalties, however this is based on a very conservative 5 per cent price increase.
According to the Government’s pre-election financial statement, a 10 per rise in iron ore equates to about a $40 million increase in royalties.
With the price rise that would mean a bonus of at least $260 million, injecting an estimated total $700 million from iron ore royalties into Government coffers.
However, it is unknown whether this figure adequately factors in the production expansions slated by most WA iron ore producers. Given the Government’s conservative royalty outlook the total figure could actually be significantly more.
Despite this the WA Government maintains it will not see any of the windfall.
A spokesman for Treasurer Eric Ripper said the net effect on WA would be nil because the Federal Government would cut grants to WA to allow for the increased revenue.
