❓ Mr. Wyatt questions the Treasurer about changes to Treasury's iron ore price forecasting methodology and its accuracy. The Treasurer defends the methodology, citing market volatility and forecasting challenges.
AnsweredQoN 628Legislative Assembly
QuestionView source ↗
IRON ORE
REVENUE FORECAST METHODOLOGY
628. Mr B.S. WYATT to the
Treasurer:
I refer to the Treasurer's explanation during the
estimates hearings in May regarding Treasury changing the iron ore methodology,
when he stated —
All I can say is that, within that
highly volatile range in Australian dollars, Treasury has been remarkably
accurate over the past few years in predicting both the effective spot market
price and the exchange rate �
(1) If
Treasury had been as remarkably accurate as the Treasurer claimed, why, then,
in 2012 was the methodology changed to adopt a more aggressive view of the iron
ore price over the forward estimates?
(2) Can the
Treasurer confirm that iron ore production volumes are still in line with the
budget forecast of 634 million tonnes?
REVENUE FORECAST METHODOLOGY
628. Mr B.S. WYATT to the
Treasurer:
I refer to the Treasurer's explanation during the
estimates hearings in May regarding Treasury changing the iron ore methodology,
when he stated —
All I can say is that, within that
highly volatile range in Australian dollars, Treasury has been remarkably
accurate over the past few years in predicting both the effective spot market
price and the exchange rate �
(1) If
Treasury had been as remarkably accurate as the Treasurer claimed, why, then,
in 2012 was the methodology changed to adopt a more aggressive view of the iron
ore price over the forward estimates?
(2) Can the
Treasurer confirm that iron ore production volumes are still in line with the
budget forecast of 634 million tonnes?
AnswerView source ↗
(1)–(2)
For a review for members of the house, iron ore price arrangements have changed
significantly over the years. When I used to help forecast them, they were on
long-term, fixed-price contracts, and the volume and price were fixed. Between
2008 and 2010, mainly due to sales to China, they changed to a spot market
determination. Treasury had to come to grips with a change in methodology, and
it has done three iterations of that while learning what to do. There has, at
the same time, been significant change in the composition, pricing arrangement,
volumes and demand parameters. That has led to huge volatility in iron ore
prices over the last three years, with the average volatility in a year being
about 45 per cent. Treasury needs to forecast not change, but the pattern
between years, to try to come to grips with a price that is a reasonable
estimate for forecasting revenue through the year; that is its task. Three
years ago, I think, it decided to come up with a methodology that was based on
the last quarter, using the recent last quarter prices to forecast for the
complete year and then using what is called a consensus forecast for the out
years. Treasury would go back to the last quarter and estimate what it would be
for the next four quarters, and then it would take a consensus forecast based
on 30-plus forecasts from around the world and use that as the forward
estimate. The problem was that if just one quarter was used, it would be highly
volatile. In the next year or so Treasury changed the methodology again;
instead of using a four-year consensus forecast, it used a 10-year forecast.
Treasury has now changed again, and in the budget period it is using the data
from the previous nine months and the Singapore spot market to forecast the
remainder of the year, and using the consensus forecast.
Was Treasury meant to follow the
market up and down? Absolutely not. Was it accurate, basically? This year we
were $2 off on our average forecast, and the previous year I think we were
about $1 off, which is pretty good. Was that luck? Yes, partly, given that
there is a 40 per cent variation. Indeed, if in 2014‑15 we had used the
previous forecasts, we would have forecast $127 a tonne rather than $122 a
tonne and we would have been worse off.
Mr B.S. Wyatt :
That's not what your answer said; you said $120 in your answer.
Dr M.D. NAHAN :
Treasury told me $127 a tonne.
Mr B.S. Wyatt interjected.
The SPEAKER :
Member for Victoria Park!
Dr M.D. NAHAN : If
we were to use the old methodology, we would have forecast a higher rate than
the current methodology, and in the forward estimates they would have been
different.
That is what we did. We relied on Treasury trying to cope
with one of the most difficult things, which is trying to forecast iron ore
royalties. Anybody in this house who thinks they could do a good job of that
should leave and get a day job. No-one out there whom I have come across claims
that they can predict that with any accuracy. I can say that when the budget
was brought down, our forecasts for 2014–15 were very close to the
consensus forecasts and other forecasts that we were using and advising on—that
is, they were tied closely to the market. Since then the price has gone down
sharply. It is surprising everyone. That is what we did. Volumes have been
surprisingly on the upside each year. Last year the production was higher than
forecast and —
Mr B.S. Wyatt : How's
it going this year?
Dr M.D. NAHAN :
Pretty good, so far.
Mr B.S. Wyatt interjected.
The SPEAKER :
Member for Victoria Park!
Dr M.D. NAHAN :
Surprisingly, production has systematically been on the upside. We are
confident we now have our forecast right. However, anyone out there who is
claiming that they can predict the iron ore price is a mug. Anybody who says
that at the time of the budget our forecasts were purposely out relative to
other forecasts is wrong. I suggest that anybody who thinks that they could have
done better forecasting than Treasury puts up their hand and puts their money
where their mouth is. More importantly, we have a challenge going forward, but
we will not panic about the iron ore price. We will watch the market and react
appropriately. I might add that in 2012 the iron ore price went down to $85 and
within two months it was $150. If we had followed the opposition's
panic mode, we would have definitely undercooked the budget; we will not do
that.
For a review for members of the house, iron ore price arrangements have changed
significantly over the years. When I used to help forecast them, they were on
long-term, fixed-price contracts, and the volume and price were fixed. Between
2008 and 2010, mainly due to sales to China, they changed to a spot market
determination. Treasury had to come to grips with a change in methodology, and
it has done three iterations of that while learning what to do. There has, at
the same time, been significant change in the composition, pricing arrangement,
volumes and demand parameters. That has led to huge volatility in iron ore
prices over the last three years, with the average volatility in a year being
about 45 per cent. Treasury needs to forecast not change, but the pattern
between years, to try to come to grips with a price that is a reasonable
estimate for forecasting revenue through the year; that is its task. Three
years ago, I think, it decided to come up with a methodology that was based on
the last quarter, using the recent last quarter prices to forecast for the
complete year and then using what is called a consensus forecast for the out
years. Treasury would go back to the last quarter and estimate what it would be
for the next four quarters, and then it would take a consensus forecast based
on 30-plus forecasts from around the world and use that as the forward
estimate. The problem was that if just one quarter was used, it would be highly
volatile. In the next year or so Treasury changed the methodology again;
instead of using a four-year consensus forecast, it used a 10-year forecast.
Treasury has now changed again, and in the budget period it is using the data
from the previous nine months and the Singapore spot market to forecast the
remainder of the year, and using the consensus forecast.
Was Treasury meant to follow the
market up and down? Absolutely not. Was it accurate, basically? This year we
were $2 off on our average forecast, and the previous year I think we were
about $1 off, which is pretty good. Was that luck? Yes, partly, given that
there is a 40 per cent variation. Indeed, if in 2014‑15 we had used the
previous forecasts, we would have forecast $127 a tonne rather than $122 a
tonne and we would have been worse off.
Mr B.S. Wyatt :
That's not what your answer said; you said $120 in your answer.
Dr M.D. NAHAN :
Treasury told me $127 a tonne.
Mr B.S. Wyatt interjected.
The SPEAKER :
Member for Victoria Park!
Dr M.D. NAHAN : If
we were to use the old methodology, we would have forecast a higher rate than
the current methodology, and in the forward estimates they would have been
different.
That is what we did. We relied on Treasury trying to cope
with one of the most difficult things, which is trying to forecast iron ore
royalties. Anybody in this house who thinks they could do a good job of that
should leave and get a day job. No-one out there whom I have come across claims
that they can predict that with any accuracy. I can say that when the budget
was brought down, our forecasts for 2014–15 were very close to the
consensus forecasts and other forecasts that we were using and advising on—that
is, they were tied closely to the market. Since then the price has gone down
sharply. It is surprising everyone. That is what we did. Volumes have been
surprisingly on the upside each year. Last year the production was higher than
forecast and —
Mr B.S. Wyatt : How's
it going this year?
Dr M.D. NAHAN :
Pretty good, so far.
Mr B.S. Wyatt interjected.
The SPEAKER :
Member for Victoria Park!
Dr M.D. NAHAN :
Surprisingly, production has systematically been on the upside. We are
confident we now have our forecast right. However, anyone out there who is
claiming that they can predict the iron ore price is a mug. Anybody who says
that at the time of the budget our forecasts were purposely out relative to
other forecasts is wrong. I suggest that anybody who thinks that they could have
done better forecasting than Treasury puts up their hand and puts their money
where their mouth is. More importantly, we have a challenge going forward, but
we will not panic about the iron ore price. We will watch the market and react
appropriately. I might add that in 2012 the iron ore price went down to $85 and
within two months it was $150. If we had followed the opposition's
panic mode, we would have definitely undercooked the budget; we will not do
that.
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