This week, the iron ore markets have been gripped by panic following alarming remarks from Hu Wangming, chairman of Baowu Steel Group, the largest steel producer globally. At the company's half-year meeting, Wangming cautioned that the current downturn in the steel industry would be “longer, colder, and more difficult to endure than we expected.” His comments drew parallels with the severe market disruptions experienced during 2008 and 2015, suggesting that the challenges ahead could surpass those "major traumas." This stark warning has sent ripples throughout the iron ore sector, triggering a significant decline in prices.
Benchmark iron ore prices have plummeted by 3.6% this week, settling at $95.25 per metric ton. This decline has been exacerbated by fears stemming from Baowu's forecast of a “harsh winter” for the industry. The current price marks a staggering drop of over 30% since the beginning of the year, reaching its lowest point since November 2022. In Singapore, futures have also seen a decrease, falling by as much as 1.9% to $93.85 per metric ton on Thursday, further intensifying the sell-off in mining stocks.
The ramifications of this price slump extend beyond market sentiment; they pose a significant threat to the federal government’s ability to deliver a third consecutive budget surplus. Treasury analysis indicates that a decrease of $10 per metric ton below projected prices could lead to a revenue shortfall of $2.4 billion for the fiscal year 2024-25, escalating to $4.5 billion over two years. Such figures provide ammunition for the Coalition as they prepare for the upcoming election, highlighting the precarious nature of the government's financial forecasts.
One of the primary factors contributing to the decline in steel demand in China is the struggling property sector, which accounts for approximately 30% of the nation's steel consumption. Despite Chinese policymakers announcing a funding package of 500 billion yuan (around $106 billion) in May, analysts believe this amount falls drastically short of what is needed. Market estimates suggest that spending of between 2.5 trillion to 7 trillion yuan is essential to address China's excess housing inventory. With no additional support measures announced during recent political meetings, optimism about resolving the property crisis is fading.
As Australia’s key export commodity continues to decline, financial institutions like Westpac predict that the disparity between spot prices and Treasury forecasts could widen to $25 per metric ton by the end of December. This projection further jeopardizes the Albanese government’s hopes of achieving a budget surplus in the same year as the election. Earlier in May, the government had forecasted a deficit of $28.3 billion for 2024-25, with Treasurer Jim Chalmers acknowledging that spending pressures were mounting without committing to a third surplus.
The political implications of these economic shifts are significant. Shane Oliver, chief economist at AMP, noted that the government had previously leveraged unexpected rises in iron ore prices to bolster its economic management credentials against the Coalition, which has struggled with deficits for years. However, as iron ore prices continue to decline, this narrative becomes increasingly difficult to maintain. The government’s hopes of projecting a surplus in the face of falling prices are now more tenuous than ever.
The interplay between declining prices, government budget forecasts, and the struggling Chinese property market creates a complex web of economic factors that will require careful navigation in the months ahead. The future of the iron ore industry remains uncertain, and stakeholders are bracing for a potentially harsh winter ahead.
