Iron Ore and Its Significant Influence on Australia’s Economy

Australia’s economic resilience, particularly during global crises, can be largely attributed to one key player: iron ore. This article examines the role of this commodity in bolstering Australia’s economy.

Iron ore has been the linchpin of the Australian economy, shaping numerous investment portfolios throughout the 21st century

The Economic Impact of Iron Ore

In 2021, resources accounted for 68 per cent of Australia’s export revenue. This was the year that iron ore prices peaked at almost $US230 a tonne.i

Large quantities of iron ore were discovered in Australia as far back as 1822 in Tasmania. However, its growth as an export icon really took off with the first shipment of iron ore from the Pilbara in Western Australia in 1966.

The Role of Major Mining Companies

Currently, three major companies dominate iron ore mining in Australia – BHP, Rio Tinto, and Fortescue Minerals. Considered blue chip stocks, they are often favourites with investors and their share price performance is linked to iron ore prices. Together, these miners are responsible for 76 per cent of production in Western Australia and contribute to 38 per cent of global production.ii

Share of iron ore production by company, 2021

Source: GlobalData’s Australia Iron Ore Mining to 2026 report

Iron ore’s importance worldwide stems from its use in steel, a key material used in infrastructure, housing and manufacturing equipment globally. Manufacturing includes such things as cars, ships, trains, trucks and pipelines. Iron ore is also used in cast iron and stainless steel which in turn have many applications.

China’s Influence on Iron Ore Demand

China stands as the primary consumer of Australia’s iron ore. In 2022 China bought 1.1 million tonnes of iron ore, 65 per cent of which came from Australia.iii

The driving force powering this demand was the urbanisation and industrialisation of China. China actually produces more iron ore than Australia but it is at a much lower grade.

No wonder, Australia has been riding on iron ore’s back.

While demand is still high in China, Covid put a dampener on its economic growth when the country basically shut down for an extended period. Its strict measures did not start to roll back until December 2022 and investors began to worry.

While economic activity is slowly resuming, it has reduced significantly from its heady days. As a result, demand for iron ore has also fallen.

This has led to a significant drop in iron ore prices, falling to around $US100 a tonne from its peak of $US230 million in 2021.

Although China’s economy is not performing as energetically as it did a decade ago, Premier Li recently told the World Economic Forum that it was rolling out more measures to boost domestic demand.iv

This has triggered some optimism among market watchers, although there are still bears around who are more circumspect.

Global demand

It is not only in China where demand for iron ore is falling. The rest of the world is wrestling with recession and that too has put a dampener on the market.

Added to this slowdown in demand is the move to increase supply. The major Australian producers and Brazil’s Vale Mining have all got new projects and expansions on the horizon.v

Luckily, iron ore is relatively cheap to mine in Australia, costing Rio Tinto and BHP $US30 a tonne to produce, which means they are somewhat sheltered from price fluctuations. While Rio Tinto and BHP can remain profitable with prices dropping as low as $US60, lower prices will have a flow on effect, impacting superannuation balances, investor returns and the broader

Iron ore price outlook, quarterly

Source: Bloomberg (2023), Department of Industry, Science and Resources (2023)

Impact on the economy

Unfortunately, lower profits mean the Australian Tax Office will also receive significantly lower revenue and that in turn will impact on the Australian economy.

While profits are still boosting the government’s coffers, the outlook is less bright.

The robustness of the Australian economy and the recent return to a budget surplus after 15 years of deficits can be largely attributed to the tax revenue from iron ore.

In fact, the federal government is expecting the surplus in 2022-23 to be a whopping $19 billion, significantly higher than the $4.2 million original forecast in the May Budget. Not all that growth is attributed to strong commodity prices, but they have certainly played a part.vii

Nevertheless, the domestic economy is still expected to slow as high inflation and global challenges make their mark.

Budget papers estimate that a $US10 per tonne increase in the Commonwealth’s assumed price for iron ore exports is expected to result in an increase in tax receipts of around $500 million in both 2023-24 and 2024-25.viii

But the federal government is still cautious about the economic outlook for Australia and are forecasting a return to a budget deficit and the possibility of a recession as the move to higher interest rates puts brakes on the economy.

Aside from economic performance, any reduction in revenue for the mining companies will also translate into lower dividends and lower price growth for investors.

Despite some market pessimism and increasing ethical and environmental concerns leading investors away from mining stocks, it’s undeniable that iron ore remains a lucrative investment.

If you would like to discuss options for investment in the current economic climate, then give us a call.


This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.