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Does the budget surplus rely too much on iron ore prices?

Kenneth Hall

The Aussie iron ore miners have been performing strongly in 2019 amid a commodities rebound – but does the Federal Government’s budget surplus lean too heavily on iron ore?

How have the ASX miners performed this year?

Fortescue Metals Group Limited (ASX: FMG) has led the way for the ASX-listed iron ore miners this year.

The Fortescue share price has climbed 160.48% since the start of January to be a standout performer on the ASX 200. For context, those capital gains are better than both Afterpay Ltd (ASX: APT) and Nanosonics Ltd (ASX: NAN) in 2019.

Fortescue is the world’s fourth largest iron ore miner behind BHP Group Ltd (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Brazil-based Vale.

Strong earnings and a steep sell-off in the second half of 2019 have combined to give Fortescue some huge capital gains this year.

Iron ore prices have rebounded this year largely thanks to stronger demand and a shutdown of Vale’s iron ore mines following the 2019 Brumadinho dam disaster.

Fortescue shareholders aren’t the only ones benefiting from the commodities boom, with the Federal Government’s budget surplus leaning on iron ore prices for revenue.

Is the Federal Government’s budget surplus too reliant on iron ore?

The Federal Government’s budget surplus is already looking wafer thin. The Liberals are now forecasting a $5 billion surplus after yesterday’s Mid-Year Economic and Fiscal Outlook (MYEFO) downgrade.

That’s down from the $7.1 billion that was forecast ahead of the federal election, after downgrading expected wage growth and GDP forecasts.

However, the budget surplus does still rely on significant revenue from the country’s iron ore exports. While iron ore prices remain elevated this year, increased supply from Vale’s revamped mine output could put pressure on the Aussie economy in 2020.

If that’s the case, Fortescue shares (as well as BHP and Rio Tinto) could be worth watching in 2020. While the budget surplus itself isn’t too vital, a lagging economy could mean trouble for the ASX 200 next year.

The post Does the budget surplus rely too much on iron ore prices? appeared first on Motley Fool Australia.

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Kenneth Hall has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO. The Motley Fool Australia owns shares of and has recommended Nanosonics Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019