Western Australia’s future growth at risk as iron ore tumbles below $US90 per tonne

The price of WA’s most economically-important commodity has fallen to levels not seen since 2022, gutting billions from the State’s coffers in the process. But the boffins say there is no need to panic — yet. The iron ore spot price dropped to $US89.85 ($134.77) per tonne on Monday, the first time it has been below $US90/t since November 2022 and marks a $US46.42/t decline since the start of this year. The WA Government on average collects an additional $94 million annually in royalties for every $US1 the iron ore price beats the $US75/t State Budget assumption. This means WA has forgone about $3.2 billion in royalty revenue this year from the price crash. That figure is approximately the combined cost to build Optus Stadium and Perth’s Children Hospital — both opened in 2018 — even adjusting for inflation. Despite billions of dollars having gone up in smoke, University of Western Australia mineral economist Allan Trench told The West Australian the State Government’s conservative approach to iron ore forecasting means most people will be shielded from an immediate impact. “The (WA) government has factored in a mid-$US70s price so that day-to-day spending, like police and nurses budgets and ongoing infrastructure projects, should not be affected,” he said. “It’s things that were on the drawing board that might get pushed down the road.” WA was burned by overly optimistic Budget iron ore price forecasts during the Barnett Government’s reign in the early 2010s. The State lost its coveted AAA credit rating in 2013 after a gap between projections of $US122/t and the actual price below $US80/t decimated WA’s financial health. Since that snafu the Government of the day tends to adopt a forecast that is more conservative than prevailing market predictions. The China (and Brazil) problem The vast majority of the iron ore mined in WA, and across the rest of the world, is shipped to China and used as a key ingredient in the steelmaking process. This means the iron ore price is heavily tied to China’s appetite for steel. Chinese steel demand has been waning over the past year as its property sector collapses. The country’s population growth is slowing down and after years of red hot house price growth it appears the bubble has burst. EY senior economist Paula Gadsby said pressure was also emerging for WA on the supply side. “There’s also been a little bit of an increase in global iron ore supply as well, mainly out of Brazil, which is Western Australia’s biggest competitor in the seaborne market,” she told The West. “So these market forces no doubt have an impact (on the broader economy) . . . last financial year (FY2024) WA received I think just under $10b from iron ore royalties and nearly 90 per cent of all its royalty income comes from iron ore. “Luckily WA and Commonwealth Treasury have a more conservative approach to forecasting iron ore, which helps create a buffer against price shocks.” The biggest losers All the experts The West spoke to agree BHP and Rio Tinto will keep chugging along even if the value of iron ore deteriorates significantly more. Of the major miners Mineral Resources and Fortescue are most at risk, according to Wilson Asset Management lead portfolio manager Matthew Haupt. MinRes’ overall iron ore operations become “quite marginal” at around $US70/t, Mr Haupt believes, and Chris Ellison’s flagship company has other issues to contend with. “MinRes has got lithium on the side, which is in the toilet as well, and huge capital expenditures to pay off,” he said. “If you do believe iron ore is dead then its Fortescue that’s going to be hit the hardest because it’s a single commodity stock. “But from an industry perspective, the death of iron ore has been called a million times and we’re getting to that point again, which I think is probably a little bit overblown.” He says seasonality is playing a factor in the current slump, as iron ore prices generally dip through August and September. WA house prices A tumbling iron ore price could also create a fork in the road moment for WA’s ultra hot residential property market, but not in the near-term at least. “We (WA) have got the strongest population growth in the nation, which is a big part why we’re seeing house prices go so strong,” Ms Gadsby said. She said a big portion of that population growth has been driven by people migrating from over east and overseas, many of whom have been lured by a tight labour market in the resources industry. “A lower iron ore price might curtail public spending on infrastructure and private spending on mining projects, which would then have flow on effects that could see that population growth come off a bit.”