The current conditions in the commodity markets may represent an unsustainable bubble which is open to a sudden correction, warns a new report from Standard and Poor's global rating service.
According to Standard and Poor's, the current commodity prices are unprecedented and are susceptible to even a modest economic slowdown in China. Commodities prices this year have been at or near record levels, and the current situation represents an unsustainable bubble, which may inevitably burst.
Hugh Tobin, Director of the North Australia Project at free market think tank the Institute of Public Affairs said Australia needs to be ready for the impact of a potential fall in commodity prices.
'Any sudden correction in commodity prices would have a profound impact on the profitability of the Australian mining sector, he said.
'If the drop were sudden and sustained, the federal government would need to fill a massive black hole in the budget if it is to return to surplus by 2013/14.
'Despite the current boom conditions, the resource sector in Australia is under significant global pressure to remain competitive. We need to ensure that we are doing everything possible to put in place policies that support the resource sector in the long term,' said Mr Tobin
According to Standard and Poor's, commodities such as iron ore, coking coal, aluminium and copper could fall by as much as 30 - 40 price in a price correction.
Mr Tobin said Australian policy makers should be looking at establishing a Northern Special Economic Zone to help ensure that the resource sector is as competitive as it can be.