Things are looking a little shaky down under for the Abbott government. The global iron ore price dropped to $44 USD a tonne this past week. This is the lowest recorded price ever in Australia’s significant iron ore history. The country continues to export huge amounts of iron ore despite the fact that the demand for the commodity has decreased dramatically.
Australia relies heavily on the success of their iron ore exports. According to the Reserve Bank of Australia, iron ore accounts for just about one-fifth of the value of all of the country’s exports.
To add insult to injury, according to Justin Smirk a Westpac senior economist, the real price of the ore is closer to $36 US per tonne once the freight costs and exchange rates are taken into account.
The fall in the price of iron ore is causing even more panic about the global financial situation. Combined with the unparalleled decline of China’s stock market, and the pending debt crisis in Greece, global financial leaders have their heads in their hands.
Economists are warning that Australia is in danger of incurring a $6.5 billion hit to the government tax receipts if the iron ore levels stay at this rate. The situation could potentially lead to a significant federal budget deficit. The Commonwealth’s economic forecasts are based on the assumption that iron ore would not dip beneath $48 US per tonne.
Warren Hogan, the ANZ chief economist is hoping that these all time low ore prices are a short term reality. He believes that they have been brought on by the widespread uncertainty in the world’s financial situation and should sort themselves out in due time.
However, if the rate of iron ore stays below $50 US per tonne, Australia could see long lasting economic consequences. Hogan optimistically hopes that the rates increase to $60 US per tonne shortly, stating that the long term consequences will not be as drastic should the rate per tonne increase.
The writing on the wall for the decline in the price per tonne of Australia’s iron ore has been there for some time. While iron ore from Australia was once exported at $120 US per tonne, current conditions are telling a very different story. It is believed that the one cause of the decline is the reduced demand in China.
According to Treasurer Joe Hockey, for every $10 that the price per tonne falls, the Australian economy suffers a blow of $2.5 billion in revenue. The Australian government is watching with bated breath as the price of iron ore being exported from Australia remains volatile.