Chilling warning for Australia over $30 price drop
The price of Australia’s dominant export earner, iron ore, has fallen by a chunky 25 per cent since its early 2024 peak of US$144 a tonne to now be less than US$110 a tonne.
This is a big move and, if sustained, adds to the downside momentum for the Australian economy in 2024.
In 2023, Australia exported 895 million tonnes of iron ore, valued at more than $124 billion. Around 80 per cent of the iron ore exports went to China. The dominance of iron ore in Australia’s exports, and the concentration China has as the main buyer, is making the price fall somewhat worrying.
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The key reason behind the falling price is the slowing in the Chinese economy. Iron ore is used to make steel, which in turn is a vital material for construction and parts of manufacturing.
As China’s economy slows, new construction is scaled back, which feeds through into lower demand for Australia’s iron ore.
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At this stage, the price fall is not yet a headline problem – iron ore miners are still profitable with a price above US$50 a tonne. That said, all businesses, especially miners, love to get a high price for their output. The higher the better.
But the drop in the iron ore price is dimming one of the bright spots for the Australian economy, and the share prices of the big iron ore producers - Fortescue, BHP and Rio Tinto – are down by around 15 to 20 per cent in a few months.
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When commodity prices are massively above the cost of production, the so-called windfall profits feed into their share price, the dividends they pay shareholders, bottom-line profits, and the tax they pay to the government. All of these add up to a solid positive contribution to the economy.
When prices fall, those windfall gains are eroded, creating downside to the economy. This erosion of national income, via a lower price for iron ore, will be notable if it is sustained or if there are further price falls.
Each US$10-a-tonne change in the iron ore price on around 900 million tonnes of annual exports totals US$9 billion. In Australian dollars, that’s around $13.5 billion per annum. The fact the price is down by around US$30 a tonne from its recent peak is a trimming of around $40 billion per annum from export receipts. It could be more if the tonnages of iron ore exports are scaled back as the economy slows.
