Iron ore to China: A blow to Australia’s economy as the value of our biggest export halves

The price of Australia’s biggest export is expected to fall further, depriving governments of much-needed revenue during an economic downturn.

Iron ore, used to make steel, was by far Australia’s biggest export last year, worth $136 billion, due to insatiable demand from China.

Western Australia’s Pilbara region supplied the world with 38 percent of China’s iron ore and two-thirds of China’s iron ore came from there.

But the bursting of the Chinese property bubble will cause iron ore prices to fall even further than they have already done since early 2024.

Apartment building giant Evergrande was liquidated earlier this year by order of a Hong Kong court and Country Garden, another developer of mega apartment towers, faces a similar fate.

AMP Deputy Chief Economist Diana Mousina said iron ore prices could fall further if Chinese stock market investors get nervous and lower risk sentiment weighs on key commodity prices.

“The risk is really in financial contagion, rather than steel demand,” he told Daily Mail Australia.

“It depends on whether there is an expectation that global growth will slow; typically, commodity prices move based on expectations of demand; you can see this very clearly in things like oil prices and even iron ore.”

Iron ore prices, including cost and freight, have fallen from $144 a tonne in January to just $100 this week.

That 31 percent drop is forecast to soon exceed 50 percent, with Western Australian Treasury officials expecting the price to fall to US$71 by November this year, or the long-term average.

The state’s May budget predicted its iron ore royalty revenue would fall by more than a third to $6.329 billion in 2024-25, down from $9.85 billion in 2023-24.

Falling iron ore prices would also deprive the federal government of $3 billion in revenue, forcing it to cut spending or further increase the national debt.

The May Budget predicted that iron ore prices would almost halve to just US$60 per tonne by the March quarter of 2025, down from levels then above US$100 per tonne.

“I think there is a risk of iron ore prices falling, but for the price to fall to $60 a tonne, the Chinese economy would need to weaken much further,” Mousina said.

“We have seen some announcements from Chinese companies that iron ore prices are likely to be lower due to lower steel demand and lower infrastructure needs, both in the housing market and also in the broader economy.”

Every $10 per tonne drop in iron ore prices equates to a loss of $500 million in government revenue.

Canberra quotes the freight on board price before transport costs are taken into account, while the WA Government quotes the cost and freight price, which is typically about US$10 per tonne higher.

The bad news comes at a time when Australia’s economy has grown just 1% in the year to June, the slowest pace of growth outside a pandemic since the 1991 recession.

Apartment building giant Evergrande (Hebei province apartments, pictured) was liquidated earlier this year, on the orders of a Hong Kong court, and Country Garden, another developer of mega apartment towers, faces a similar fate.

Falling iron ore prices are also causing Australia to run larger current account deficits.

From mid-2019 to the end of 2023, Australia had only experienced two quarters of current account deficits, but that was at a time when China was still consuming large amounts of steel to build apartment towers.

Australia was enjoying successive current account surpluses for the first time since the early 1970s, but that changed in early 2024.

But Ms Mousina said iron ore prices might not fall as much as feared because there was still demand for steel in the manufacturing sector to offset losses from falling property demand.

“The housing market there is extremely low, it is going through very difficult times with low property sales and negative growth in housing prices,” he said.

“But some sectors of the manufacturing industry are still quite strong.”