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What’s next for Australia’s largest export?

By Jessica Penny
4 minute read

Declining iron ore prices, driven by weak sentiment in Chinese demand and ongoing market factors, are causing concerns for Australian exporters and impacting the country’s budget outlook.

Iron ore futures fell by 52 cents to reach a nearly 10-month low of $99.89 per tonne on Thursday, while Australian exports of the material increased.

This dip below the $100 per tonne threshold represents a more than 25 per cent decline from the levels seen in January, when prices were over $130 per tonne.

Australia’s dominant export, which brought in $131 billion last financial year, is facing growing concerns with projections suggesting that its export value could decrease by approximately $30 billion in the 2024–25 period.

Namely, in a recent market outlook, Westpac projected prices to drop to US$82 a tonne and hold there through the second half of financial year 2024, before a slight increase to US$84 by December 2025.

According to the big four bank, the decline in iron ore prices is attributed to weak sentiment regarding Chinese demand and ongoing soft fundamentals. These include rising iron ore port inventories, tight or negative steel margins, depressed blast furnace utilisation rates, and the China Iron and Steel Association reporting weak crude steel production up to mid-March.

Westpac also reported that falling iron ore prices – a loss of 11 per cent in March – helped drive down its commodities index by 4 per cent last week.

The big four bank acknowledged that the most significant correction was in metallurgical coal, which experienced a loss of over 19 per cent in the month. However, it also pointed out that the correction in iron ore prices has been continuous, with a 6 per cent decrease over the year.

“We have been watching the ongoing correction in the Chinese iron ore market and, at least for now, hold our end 2024 forecast of US$82/t,” it said in its latest market outlook.

Last month, Treasurer Jim Chalmers revealed that revenue upgrades in the May budget will be more conservative than the initially projected $69 billion over four years, citing the decline in the price of iron ore prices as the culprit.

“There’s no use pretending it doesn’t have an impact on the budget bottom line,” the Treasurer told Sky News last week.

“It is concerning to see the iron ore price a bit lower than we have been used to … it’s fallen by about a third just this calendar year alone. Obviously, that will flow through to the budget.”

While he did not entirely rule out revenue upgrades, Chalmers said they will be “nowhere near” those seen in previous budgets.

“There’s always a premium on responsible economic management, but I think particularly with this one, which is probably a bit harder to land than the first two, because we’re not getting the same kind of revenue upgrades, the balance of risks in the real economy has shifted and is shifting.

“We will spend the bulk of the next six weeks making sure that we strike all the right appropriate balances, we deliver a responsible budget which is still focused primarily on inflation but recognises we’ve got a growth challenge as well.”

Meanwhile, in the Reserve Bank’s (RBA) March minutes, it was revealed that board members expressed concern about the outlook for steel demand, which had a negative impact on iron ore prices. This situation was noted to be reducing incomes for Australian exporters.

In February, RBA governor Michele Bullock emphasised that keeping an eye on China is crucial in the global context, given its significant influence on Australia through its impact on commodity prices.

“Growth in China has been quite sluggish. So that’s something for us to watch,” she said.

“The main way through which that impacts Australia is through commodity prices and our exports to China. So far, the iron ore price, in particular, and coking coal prices have tended to hold up because even though the real estate industry in China is not doing so well, the manufacturing industry and public infrastructure is doing quite well.”