The major China decision that is set to dramatically hurt Australia – and why the Albanese government is seriously worried

The crisis in China’s steel industry and the crackdown on debt-ridden apartment developers are expected to cost the Australian government $3 billion in budget revenue.

Finance Minister Jim Chalmers has published new analysis predicting that a sharper fall in the price of iron ore, Australia’s biggest export, will reduce corporate tax revenues over the next four years.

“We are closely monitoring these developments because of their potential impact on our economy and our budget,” he said.

‘The weak Chinese economy and the recent decline in iron ore prices are further evidence that we are not immune to volatility and uncertainty in the global economy.’

The Finance Ministry’s May budget forecast that iron ore prices would halve to just $60 a tonne by the third quarter of 2025, down from then-current prices of more than $100 a tonne.

Iron ore prices fell to $81.80 a tonne by the end of trading on Thursday, a level not seen since 2022 as China buys less of the raw material used to make steel.

That was below the $83 per tonne level forecast by the Treasury for August 2024, another sign that economic weakness in China, Australia’s largest trading partner, will be felt in Australia for years to come.

Every $US10 per tonne drop in the iron ore price equates to a loss of $500 million in potential government revenue.

Iron ore prices have fallen 7.5 percent in the past week alone after China’s Baowu Steel Group, the world’s largest steel producer, warned that the downturn in the steel industry is worse than expected.

Hu Wangming, the multinational’s chairman, told Baowu’s half-yearly meeting that the results were “more difficult to bear than we expected”.

The steel crisis comes just six months after a Hong Kong court ordered the liquidation of apartment complex Evergrande, also putting developer Country Garden at risk.

Vivek Dhar, director of mining and energy research at the Commonwealth Bank, said Baowu Steel’s comments had spooked financial markets.

“It’s true that the margins are very, very low and so negative that you would say something like, ‘Wow, the steel sector is bleeding away,'” he told Daily Mail Australia.

According to Mr Dhar, the collapse of Evergrande has significantly worsened demand for Australian iron ore since early 2024.

“Since Evergrande, these problems have only increased,” he said.

According to Mr. Dhar, 30 percent of steel consumption goes to housing. The decline in spending on transportation infrastructure also had a negative impact on the demand for iron ore.

“Weak demand for steel is putting enormous pressure on steel prices,” he said.

Finance Minister Jim Chalmers has published new analysis predicting that a bigger-than-expected fall in the price of iron ore, Australia’s biggest export, will reduce corporate tax revenues over the next four years

In 2020, Chinese President Xi Jinping’s Communist Party imposed a “three red lines” policy on apartment builders to address the oversupply crisis that had led to ghost towns.

As a result, house prices have fallen sharply, with China’s National Bureau of Statistics reporting a 4.9 percent decline in the year to July.

Existing homes fared even worse, with values ​​falling 8.2 percent over the year, even though the number of housing starts is 60 percent below the 2021 peak.

Anthony Albanese is the first Labour prime minister since 1989 to achieve two consecutive budget surpluses.

But the $9.3 billion surplus for 2023-24 was based on high iron ore prices, which boosted corporate tax revenues.

A budget deficit of $28.3 billion was forecast for 2024-25, rising to $42.8 billion in 2025-26.

Lower corporate tax revenues from iron ore shipments to China are expected to lead to larger budget deficits than the Treasury Department had anticipated unless government spending is cut sharply.

The Treasury Department lists iron ore prices without freight charges, which are typically about $10 per tonne lower than the price including transport costs.

By the close of trading on Thursday, iron ore prices had fallen to $81.80 a tonne, a level not seen since 2022, as China bought less of the raw material used to make steel