Tumbling iron ore price dampens economy, but lockdowns hitting SMEs harder

Australia’s largest export source has suffered a blow after the price of iron ore tumbled by more than 50% over the past two months due to political tensions and China’s push to lower its carbon emissions.

While the sudden fall in the price of iron ore will hit small businesses in the mining supply chain, the vast majority of SMEs across the country will be more challenged by domestic pressures on the economy, namely ongoing lockdowns in NSW and Victoria.

Harley Dale, chief economist at CreditorWatch, says the drop in iron ore prices is due to a decline in Chinese demand for steel in housing production, as well as China’s move to reduce air pollution ahead of the Winter Olympics and its goal to become carbon neutral by 2060.

“We’ve actually seen the iron ore price halve in the space of only two months and that’s got to be damaging for the income component of economic activity in Australia,” Dale tells SmartCompany.

The price of iron ore hit a high of US$200 ($276) a ton in May but dropped to about US$90 earlier this week. Dale says the high seen in May was an unusually strong price and was “never going to be sustainable”.

The drop in demand for iron ore comes after President Xi Jinping told the UN General Assembly on Tuesday that China will stop funding coal projects overseas as part of a plan to tackle climate change.

“If you put together the coal and iron ore stories, it does significantly risk dampening the rate at which the Australian economy grows in the future,” Dale says.

Analysts have also attributed plunging iron ore prices to tense relations between the Chinese and Australian governments.

The Australian Strategic Policy Institute (ASPI) released a report on Wednesday, examining the future of Australian iron ore exports to China.

Iron ore exports to China have been a “bonanza” for mining companies, investors and governments over the last year but the collapse of bilateral relations will affect the economy, the report states.

“China’s authorities are unhappy both with China’s dependence on Australia and with the prices its mills have had to pay for iron ore,” ASPI economist David Uren wrote.

According to CreditorWatch, Australia’s economy is forecast to contract in the September quarter but has the potential to rebound in the December quarter.

“It’s not a very nice story but that’s the life we’re living with so many Australians in lockdown,” Dale says.

Meanwhile, business confidence has started to grow, with sectors such as retail and hospitality planning for a gradual reopening of state economies in NSW and Victoria.

“There’s a hiring spree in the retail sector, where there has been a 55% jump in enquiries for hiring short-term jobs compared to this time last year,” Dale says.

“Smart businesses are starting to gear up to the fact that when things reopen, they will see a big spark in the economy.”