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New China threat facing the Aussie economy

an image of both the Chinese and Australian flags with cracks showing a fractured relationship.
As China gears up to host the 2022 Winter Olympics, Australia's iron ore exports are taking a hit (Source: Getty)

The price of Australia’s most profitable export, iron ore, is plummeting and a big reason is because China is preparing to host the 2022 Winter Olympics.

China, which will host the Beijing 2022 Winter Games has put a hold on steel production plants in an attempt to cut down air pollution before the games in February.

Which means the Aussie economy is facing a potential fall of over a billion dollars a month in iron ore exports to China.

This could not have come at a worse time as the Aussie economy is also facing pressure from the outbreak of the COVID-19 Delta variant which has caused widespread lockdowns.

Why have iron ore prices plummeted?

Iron Ore prices have plummeted over the last month after the Chinese government gave a directive to lower the production of steel to cut emissions.

This comes after the nation had already started reducing its iron ore imports earlier this year.

May saw 89.8 million tonnes, down from $98.6 million purchased in April and $102.1 million in March. Total imports from Australia to China in May came to US$13.6 billion.

But the most recent push to reduce imports has been due to the Beijing 2022 Winter Olympics, in which the Chinese government is aiming to clear out the fog to give spectators clear skies.

Iron ore is the main ingredient in the production of steel and the steel sector in China produces as much as 20 per cent of the country’s carbon emissions, CNBC said.

How is it affecting Aussie miners?

Australian miner BHP foreshadowed in its earnings results that the heydays of booming iron ore prices might be coming to an end on the back of China’s decision.

“Medium-term, China’s demand for iron ore is expected to be lower than it is today, as crude steel production plateaus and the scrap-to-steel ratio rises,” the miner said in its outlook.

BHP shares have lost more than 13 per cent in the past two days.

Another major iron ore miner, Rio Tinto, had its shares decline by more than five per cent yesterday.

What effect will this have on the Aussie economy?

Iron ore brings in about $136 billion to Australia’s economy a year, and is by far Australia’s largest and most valuable export.

Last year, when Australia was suffering through its first wave of the COVID-19 pandemic our iron ore exports were praised for helping save the economy.

But now, as the nation is yet again plunged into lockdowns, a reduction in our biggest export could spell serious trouble for our economic recovery.

In the five years before the pandemic, Australia was in a mining boom with exports adding as much to the economy as every Australian household combined.

What effect this will have on the Australian economy in the long run we will just have to wait and see.

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