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Australia raises forecasts for iron ore, coal prices as China construction boosts demand

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Australia on Friday raised price forecasts for its major commodity exports, iron ore and coal, on the back of an unexpected improvement in demand from Chinese steelmakers as construction activity picked up.

In Australia's latest quarterly outlook published by the Department of Industry, Innovation and Science, the country boosted the iron ore price outlook this year by 10 percent to $48.50 a metric ton from $44.20 a ton, while the coking coal price forecast jumped 16 percent to $99.40 a ton from $85.60 a ton. But those forecasts were below current market prices. Both commodities are used in steelmaking.

The Australian government attributed the upturn to the strength of the Chinese construction sector as the mainland government rolled out stimulus measures, including steps aimed at boosting home sales to reduce large inventories in an effort to limit an economic slowdown.

"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," wrote the department's chief economist, Mark Cully.

China is experiencing a resurgence in construction as the government boosted stimulus measures in a slowing economy.
Greg Baker | AFP | Getty Images

Iron ore prices have been on the run this year and are currently around $55 a ton or over 30 percent higher year-to-date, while coking coal prices have doubled to above $200 a ton.

Coal's resurgence come on the back of tighter supply on mine closures globally amid a price crash across the commodities complex. China was also cutting over-capacity and curbing local production in a bid to improve air quality at the same time, leading to a shortage currently.

The uptick in China's construction activity was unlikely to persist, warned the Australian government.

"Despite a modest draw down in inventories in the first half of 2016, the (Chinese) residential property market remains oversupplied. Efforts by the Chinese government to reduce excess steelmaking capacity may also see some reduction in demand for iron ore and metallurgical (coking) coal," the report said.

Australia's price forecast for iron ore in 2017 was $45 a ton and that for coking coal was $107.50 a ton.

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