China Throws Gillard Lifeline as Iron Ore Revives

The determination of China’s new Communist leadership to guard against slower economic growth could throw a political lifeline to Australia’s first female prime minister as she bids for re-election.

China’s growth is forecast to accelerate this year, helping spur a 78 percent rebound in the price of iron ore that led Perth-based Fortescue Metals Group Ltd. (FMG) to resume work at a project suspended four months ago. A revival of the mining boom would boost tax revenue and bring Prime Minister Julia Gillard’s budget surplus goal within reach as she seeks to come from behind in polls in an election due later this year.

“It does put a surplus back in play,” said Shane Oliver, head of investment strategy in Sydney at AMP Capital Investors Ltd., which manages more than A$126 billion ($132 billion). “That’s important for the government politically as the debate has come down to ‘in surplus good, in deficit bad,’ which is unfortunate because it ignores the fact that Australian finances are in good shape.”

Gillard’s minority government has been criticized by the opposition after the prime minister reneged on a 2010 election pledge not to introduce a carbon tax and backpedaled last month on a promise to deliver a surplus this year. Her administration trails in opinion polls even as the nation entered its third recession-free decade that’s yielded contained inflation, low unemployment and higher growth than other developed economies.

‘Attack Tool’

“Voters would respond very well to the government running a surplus,” said Zareh Ghazarian, a political analyst at Melbourne’s Monash University. “It would also take out an important attack tool the opposition had.”

Reflecting the surge in iron-ore prices, the 10-year yield on Australian government bonds is at 3.41 percent, above the central bank cash rate. The local dollar has stayed above parity with the U.S. currency for more than six months, its longest stretch on record.

BHP Billiton Ltd. (BHP), the world’s largest miner, has advanced 21 percent since Sept. 5. Iron ore is Australia’s biggest export in dollar terms.

Another key commodity -- coking coal that’s used in blast furnaces -- may also rebound from the lowest prices since 2009 as China rebuilds steel supplies, Barclays Plc’s investment- banking unit said in a Jan. 3 report. The destocking of steel has been more pronounced than usual and restocking typically begins in late December, weeks before the Chinese New Year, the London-based bank said.

Swan’s Retreat

Treasurer Wayne Swan said last month Australia is unlikely to deliver the surplus this fiscal year as weaker growth and a strong local currency curb tax receipts.

“What we’ve seen is a sledgehammer hit our revenues,” Swan said in a Dec. 20 news conference in Canberra. Rather than find spending cuts that further slow the economy, he said the government would concentrate on supporting job growth.

Gillard had staked her economic credibility partly on delivering the first surplus since the 2009 global recession. The government, in a midyear review released in October, forecast a budget surplus of A$1.08 billion in the 12 months ending June 30. It recorded a A$44 billion deficit last fiscal year.

Returning the federal budget to surplus was rated as a high priority by 35 percent of voters surveyed by Newspoll for the Australian newspaper on Oct. 26-28, while 56 percent said it was either not a priority or a low one. The telephone survey of 1,218 people had a margin of error of plus or minus three percentage points.

Hockey’s Response

Joe Hockey, the opposition’s treasury spokesman, said Swan’s Dec. 20 announcement that a surplus was unlikely vindicated his stance on the government.

“They’ve been fudging the numbers and we said they’re never going to deliver a real surplus and we’ve been proven right,” he said in a Dec. 21 interview with Australian Broadcasting Corp. television.

The government relies on the support of Greens and independents to maintain a majority and Gillard’s popularity fell last month. Support for the ruling Labor party dropped four percentage points to 32 percent, with Tony Abbott’s Liberal- National opposition rising three points to 46 percent, according to a Newspoll survey published in the Australian on Dec. 11.

Kings Project

Increased confidence provided by a rebound in prices is reflected in the decision by Fortescue, Australia’s biggest iron ore producer after Rio Tinto Group and BHP and a bellwether for the industry, to resume work on its Kings deposit in the Pilbara region in the north of Western Australia state.

Fortescue announced Dec. 27 it will resume development that will increase production capacity by 40 million metric tons a year once the mine starts in December 2013, taking total capacity to 155 million tons a year. Macquarie Group Ltd. (MQG) said last month the company will account for about 50 percent of the growth in global iron ore supply this year.

The price of iron ore reached $153.90 per metric ton on Jan. 7, compared with $86.70 in September, a three-year low.

Prices are rising partly because of the threat of cyclone disruptions and in anticipation of rising steel demand in China following the leadership change. Prices are expected to retreat from the current highs to average $120 a metric tons this year, according to Morgan Stanley.

Cyclone ‘Specter’

“Even though there’s no cyclone scare, there is the specter hanging over the market. Buyers of iron ore are just a little edge at the moment,” Joel Crane, research analyst with Morgan Stanley Australia Ltd., said by phone.

Australia’s better prospects prompted a drop in bets on another reduction in the overnight cash-rate target at the Reserve Bank of Australia’s Feb. 5 meeting. Traders are pricing in a 40 percent chance of a quarter percentage point reduction to 3 percent, compared with 59 percent on Dec. 31, swaps data compiled by Bloomberg show.

The central bank has lowered borrowing costs by 1.75 percentage points since Nov. 1, 2011, to help cushion the economy ahead of a plateau in mining investment in the first half of this year.

A government report today showed Australia’s trade deficit widened in November to the most since 2008 as a rise in iron ore exports was offset by a surge in imports led by industrial transport equipment.

China’s Outlook

A quarterly global poll conducted Nov. 27 of 862 investors, analysts and traders who are Bloomberg subscribers showed confidence in China’s economy is at the highest in more than a year amid optimism that the new leadership headed by Xi Jinping will pursue policies that help boost growth. Xi was named general secretary of the ruling Communist Party in November and is set to succeed Hu Jintao as president in March.

China’s gross domestic product is poised to expand 8.1 percent this year, up from 7.7 percent in 2012, according to the median estimate of economists surveyed last month by Bloomberg News.

Elsewhere, unemployment in the euro area probably rose to 11.8 percent in December, economists predicted before a report today. In the U.S., a Federal Reserve report may show consumer credit in November probably gained less than it did a month earlier, a survey of economists showed.

Asian stocks dropped today as Japanese exporters declined after the yen’s advance dimmed the outlook for overseas earnings. The MSCI Asia Pacific Index lost 0.3 percent to 131.07 as of 11:59 a.m. Tokyo time.

Labor Market

Australia’s unemployment rate fell to 5.2 percent in November from 5.4 percent a month earlier and the economy expanded 3.1 percent in the third quarter from a year earlier, among the fastest in the developed world.

Still, an Australian Bureau of Statistics report next week may show job growth last month capped the worst back-to-back years since 1997 as the resource bonanza eased. Gillard’s government is counting on demand from China to improve on that and burnish her economic record.

AMP Capital’s Oliver said that even if the government didn’t achieve its surplus aim, it may record a deficit of A$3 billion or A$4 billion rather than A$10 billion or A$12 billion. “What financial markets would look at is this: last year it was A$40 billion, this year it’s a very small deficit, that’s a pretty good improvement.”

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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