Falling iron ore price due to China's real estate crisis could cost the federal budget three billion dollars

In summary:

Due to the slowdown in China's real estate market, iron ore prices have fallen faster than expected this year.

The decline could result in a $3 billion loss to the federal budget as tax revenues from iron ore exports decline.

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Weak economic growth in China continues to put pressure on Australia's resource companies.

The drastic drop in iron ore prices could cost the federal government $3 billion in revenue, which will likely further increase the budget deficit in the current fiscal year.

The Chinese real estate market is in a precarious situation as demand for iron ore – the key ingredient in steel production – has fallen significantly.

The price of iron ore was around 143 US dollars per tonne at the beginning of the year and has fallen steadily throughout the year.

But that decline has accelerated in recent weeks, and the price is now around $82 per tonne, below the price the Treasury Department had expected at the time.

The company had forecast that iron ore prices would gradually decline and settle at $60 per tonne by the first quarter of 2025.

Treasury Department analysis has shown that such a price decline in the current quarter (ending in September) would result in tax losses of three billion dollars over the next four years.

The government had already forecast a deficit of $28 billion for the 2024-2025 fiscal year, after running surpluses in the previous two years.

Workers must expect a loss of income

The Ministry of Finance often makes conservative forecasts regarding iron ore prices, which has resulted in the federal government regularly receiving higher revenues than planned.

But now iron ore prices are falling faster than expected and the Labour Party faces the prospect of lower revenues and a higher deficit ahead of the 2025 election year.

Finance Minister Jim Chalmers said the government was following developments closely.(ABC News: Matt Roberts, File)

Finance Minister Jim Chalmers described it in a statement as “another reminder that we are not immune to the volatility and uncertainty in the global market.”

“That is precisely why we take such a cautious and conservative approach to the Treasury’s forecasts for commodity prices and revenues.”

“We are following these developments very closely as they have potential implications for our economy and our budget.”

The federal government hopes that the labor market situation will remain strong, as persistently low unemployment would bring the state higher revenues through income tax.

Iron ore giants well positioned to survive low prices

China's slowing growth and weakening real estate sector have dampened investor confidence in the commodity sector.

The world's four largest iron ore mining companies – BHP, Rio Tinto, Fortescue and Brazil's Vale – saw their market capitalization decline over the course of the year.

Falling iron ore price due to China's real estate crisis could cost the federal budget three billion dollars

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Falling iron ore price due to China's real estate crisis could cost the federal budget three billion dollars

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