In short:
China’s cooling property market has seen iron ore prices tumble faster than expected this year.
The decline could see $3 billion wiped from the federal budget due to reduced tax receipts from iron ore exports.
What’s next:
Weak economic growth in China continues to put pressure on Australia’s resources companies.
Plummeting iron ore prices could cost the federal government $3 billion in revenue, which is likely to push the budget further into deficit this financial year.
China’s property market is in a precarious state, which has seen demand for iron ore — the key component for making steel – drop significantly.
Iron ore prices at the start of the year were around $143 per tonne and have been gradually declining all year.
But that decline has accelerated in recent weeks, with prices now sitting around $82 per tonne, which is below the price the Treasury had anticipated at this point.
It had forecast the iron ore price gradually declining to settle at $60 per tonne by the first quarter of 2025.
Treasury analysis finds that if prices fall to that level in the current quarter (which ends in September) instead, it would mean a loss of $3 billion dollars in tax receipts over the next four years.
The government was already expecting to post a deficit of $28 billion for the 2024-25 financial year, after delivering surpluses for the last two years.
Labor facing prospect of less revenue
The Treasury often makes conservative forecasts on iron ore prices, which has meant the federal government has regularly received more revenue than it planned for.
But now, with iron ore prices falling faster than expected, Labor faces the prospect of less revenue and a bigger deficit as it heads into an election year in 2025.
In a statement, Treasurer Jim Chalmers described it as “another reminder that we are not immune from volatility and uncertainty in the global market”.
“This is exactly why we take such a cautious and conservative approach to Treasury’s forecasts for resources prices and revenue.”
“We’re following these developments very closely because of their potential impact on our economy and our budget.”
The federal government will be hoping the jobs market remains strong, with continued low unemployment meaning more revenue for the government via income taxes.
Iron ore giants well-placed to weather low prices
China’s weakening growth and struggling property sector has dampened investors’ confidence in the resources sector.
It has seen the world’s four major iron ore miners – BHP, Rio Tinto, Fortescue and Brazil’s Vale — have their market capitalisation trend downward through the year.
Iron ore prices are at their lowest level in nearly two years, not having dropped to this price since November 2022.
Investors have been particularly spooked by remarks last week from the chair of the world’s largest steel-maker Baowu Steel, about the sector facing a “winter” that would be “colder, longer and more difficult” than previous downturns.
But Australia’s iron ore giants are among the more efficient operations globally, which means low iron ore prices are likely to squeeze smaller players before they hit the likes of Rio Tinto, BHP and Fortescue.