The plummeting Chinese property market is causing a significant drop in the price of iron ore, putting the federal government at risk of facing an unexpected $3 billion budget shortfall. The sale value of new houses in 70 of China’s largest cities has decreased by nearly 26% compared to the previous year, leading to a reduced demand for iron ore and causing prices to fall below Treasury estimates.
This decline in iron ore prices is a concern for Labor Treasurer Jim Chalmers, who was already anticipating a deficit of $28 billion for the 2024/25 financial year. Iron ore is a crucial component in steel production and is used in constructing high-rise buildings to accommodate China’s urbanizing population.
At the beginning of the year, iron ore prices were around $143 per tonne but have been steadily declining since then. The Australian Treasury had predicted a gradual decrease in iron ore prices, estimating it to stabilize at $60 per tonne by the first quarter of 2025. However, prices have already dropped to $82, below the Treasury’s projections.
If iron ore prices reach the $60 mark earlier than expected, the government could face a $3 billion revenue loss, impacting the overall budget. Recent data shows a 10.1% decrease in property investment in China in the first half of 2024, with a 19% decline in home sales by floor area.
Efforts by Beijing to support the property sector, including a $42 billion lending program, have seen slow uptake, with only 4% of the allocated funds utilized by the end of June. With iron ore prices plummeting beyond expectations, Labor may face a larger deficit as they approach the 2025 election.
Chalmers emphasized the importance of monitoring global market volatility, stating, “We are not immune from uncertainty in the global market, which is why we take a cautious approach to Treasury’s resource prices and revenue forecasts.”
The Reserve Bank is also wary of the impact of falling iron ore prices on Australia’s GDP growth. Governor Michele Bullock highlighted the potential consequences of a further downturn in the Chinese economy on trade and economic growth in Australia during a recent House of Representatives Economics Committee meeting.
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