Budget to suffer from frail iron ore price

Joe Hockey has warned the iron ore price could drop to lows of $US35 a tonne, potentially blowing a $25 billion hole in the Federal budget.

In December’s budget update, official government estimates forecast iron ore would fetch $US60 a tonne, however the price quickly fell below this level and kept falling to reach 10-year lows of $US45 a tonne.

Hockey said the price drop would have a big impact when the budget was handed down on May 12.

"There seems to be no floor. We are contemplating as low as $US35 a tonne,” Hockey told The Australian Financial Review.

This $US25 downgrade would mean $6.25 billion less revenue for the government every year for four years.

Hockey said he would gain a better understanding of the May budget inputs after meetings in New York and China this week, including with Chinese finance minister Lou Jiwei.

The Treasurer said the budget would include a “credible” path to surplus but refused to say when this could be expected.

In December the budget deficit was forecast to be $40.4 billion this year and $31.2 billion next financial year.

"There's no doubt it has an impact on our budget because iron ore has been our biggest export," Hockey told ABC News Breakfast.

"But we are not going to chase the fall in revenue associated with falling iron ore prices down.

"We're not going to be imposing new taxes in order to try and recover that lost revenue."

Unlike WA Premier Colin Barnett who has blasted major miners BHP Billiton and Rio Tinto for their part in the iron ore price dive, Hockey said he would not lecture companies on business strategy.

"I'm reluctant to tell people how to run their companies. Not that it stops them from telling us how to run the country," he said.

"But they, you know, they've got a fiduciary obligation to act in the best interests of their companies and their shareholders and they're doing that."

At the end of the latest session, benchmark iron ore for immediate delivery to the port of Tianjin in China was trading at $US47.30 a tonne.

The low iron ore price claimed the jobs of close to 600 people over the weekend after Atlas Iron announced it would mothball in Pilbara operations.

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