23/08/2021 - 14:00

Trade, market threats expose WA

23/08/2021 - 14:00

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Western Australia’s iron ore exports are breaking records, but are we at a turning point?

The value of WA’s iron ore exports in June 2021 hit $17.4 billion. Photo: Gabriel Oliveira

Western Australia’s iron ore exports are breaking records, but are we at a turning point?

The past few months have provided a sobering reminder of the fragility of our economic recovery. Seeing so many families and businesses forced into lockdown to control the COVID-19 virus surging across most of the eastern states shows us how quickly things can turn.

Recent events show that WA has again been spared many of the worst effects of the global pandemic, although hard lockdowns and border defences against COVID-19 continue to affect the state’s international education, tourism, and hospitality sectors.

However, the control of the virus has provided a degree of economic stability for WA and remains an important enabler of business activity for several our key industry sectors.

Retail businesses have fared relatively well by comparison with their counterparts on the east coast, with sharp lockdowns followed by strong recoveries in consumer spending and retail turnover.

And the state’s iron ore companies are breaking export records. The value of WA’s iron ore exports in June 2021 hit $17.4 billion. This is the highest shipment value in history, making up 73 per cent of the state’s total exports by value.

Global demand for iron ore, much coming from China, has remained strong for much of the pandemic.

The protections afforded to the WA economy have ensured that the state’s mining companies have been in prime position to capitalise, especially given the challenges faced by Brazil as the world’s second largest producer of iron ore.

Exports from Brazil have yet to fully recover from two catastrophic dam collapses, in 2015 and 2019, and a COVID-19 crisis that remains out of control.

The strength of WA’s exports throughout the pandemic has propped up the wider Australian economy.

WA accounted for 58 per cent of Australia’s exports in June, and iron ore exports now account for nearly three quarters of the state’s export value.

And China has become progressively more important as a destination for WA’s exports.

The share of WA’s total exports destined for China has risen from around half at the end of 2020 to 68 per cent by June of this year, while 85 per cent of WA’s iron ore goes to China.

But the growth in export value has been driven by rising prices rather than production volumes.

Iron ore export volumes from WA remained relatively stable at around 215 million tonnes each quarter, but prices have almost doubled from $108 to $215 per tonne over the year to July 2021.

There are several reasons to believe that the strong growth in the value of WA’s exports may be about to turn.

Iron ore prices have fallen to below $175/t over the first half of August, with some commentators forecasting prices to fall further (to somewhere between $130 and $150/t by the end of the year).

If this projection is realised, the value of WA’s iron ore exports would drop by up to 40 per cent.

There are also risks that the state’s resources sector might lose export share if the Brazilian mining sector recovers, and if China – already the world’s third largest producer of iron ore at 340mt – follows through with its commitment to lift domestic iron ore production.

The concentration of Australia’s exports from WA, and WA’s exports to China, as well as the state’s growing reliance on the resources sector, exposes us to vulnerabilities from continued falls in iron ore prices, and from escalating trade tensions with China.

• Professor Alan Duncan is director, Bankwest Curtin Economics Centre

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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