The fall in the iron ore price is one of the biggest forces at work in the Australian economy right now.
It’s punching a big hole in Australia’s income and squeezing the federal budget bottom line through lower tax revenue. It’s also putting profit margins at mining companies under enormous pressure.
The price fall is being driven by a one-two punch: falling demand from a slowing Chinese economy, and rising supply from the gargantuan operations of the biggest miners including BHP and Rio Tinto, which built in huge amounts of production capacity during the investment boom and are now reaping the benefits.
The amount of ore they’re tipping into the market is keeping prices low but their vast economies of scale mean iron ore remains profitable for them. Smaller miners with higher cost bases and less diverse businesses are seeing huge falls in profits or in some cases shutting mines completely.
This is the backdrop to Twiggy Forrest’s comments in China this week about capping production in the industry to drive up prices, which have exercised the competition regulator. Greg McKenna looks in more detail at that here.
Here’s a chart from Morgan Stanley listing all the iron ore mining operations that are going under in the current environment. As you can see, Australia is disproportionately represented in this list, the story behind which is one of job losses and failed investments.