Iron ore exports totalled almost $31 billion in the first seven months of the current June financial year, and account for about a quarter of the nation's total merchandise exports. Exports of food and live animals account for about 10 per cent of the total, and manufactured goods for about 5 per cent.
You get the picture: if the iron ore price collapses, it won't just hurt Rio Tinto, BHP Billiton, Fortescue and the smaller iron ore miners. The entire economy will suffer as projects are cut back and tax and royalty income dives - and while politicians in Canberra focus on media reform and leadership rumblings, the signals from this crucial commodity are flashing amber.
A price recovery from a "flash crash" that pushed the spot iron ore price down to $US86.70 last September peaked at $US158.90 a tonne on February 20. Since then it has fallen by 15 per cent to $US134.40 a tonne.
The fall comes as investors complete a switch in the way they look at the iron ore market. In the boom, everything revolved around the strength of demand in China. Now, the focus is on a coming iron ore glut: new research by Goldman Sachs has upgraded both its potential size, and its estimated date of arrival.
Goldman's view is shaped around a belief that high-cost Chinese iron ore production will not disappear as iron ore production expands in Australia and elsewhere.
The investment bank predicts that total sea-borne iron ore exports will surge from 1.15 billion tonnes this year to 1.5 billion tonnes by 2015, with Australia's export capacity rising from 560 million tonnes to 780 million tonnes. It sees Chinese iron ore production also increasing by between 3 and 5 per cent a year over the same period, even though it is much higher cost.
This is contrary to the conventional theory that lower-cost production from outside China including the Pilbara will replace higher-cost Chinese production as it comes on stream.
Miners including Fortescue have argued that price dips of the kind experienced in September last year will inevitably be reversed as marginal Chinese iron producers shut down, and demand from Chinese steel mills spills over to Rio, BHP and the overseas miners that ship ore to China.
Goldman believes, however, that Chinese iron producers will stay in business as part of China's broader socio-economic planning, which also considers regional employment, for example.
This is a judgment call by the investment bank, but there is a precedent. China's relatively expensive aluminium industry was also expected to be priced out of existence if the aluminium price fell, and Rio's $US38 billion purchase of Alcan in 2007 was partly predicated on that assumption. The aluminium price did fall, but the Chinese smelters secured new power supply deals, and stayed open.
Goldman predicts that 560 million tonnes a year of iron ore production will come on stream worldwide between now and 2017, with Rio, BHP, Vale of Brazil and Fortescue accounting for two-thirds of the increase.
After factoring in a modest rise in Chinese domestic iron ore production over the same period despite that production tsunami, it has raised its estimates of the likely global surpluses from 75 million tonnes to 112 million tonnes in 2014, 225 million tonnes in the following year, 275 million tonnes in 2016, and 344 million tonnes in 2017.
This is of course a recipe for a price slide. Australia's Bureau of Resources and Energy Economics says prices will average about $US90 a tonne by 2018. Goldman says the average will be about $US139 a tonne this calendar year after weather-related production setbacks in the Pilbara and Brazil, but has cut its forecast 2014 price from $US126 a tonne to $US115 a tonne, and lowered its 2015 price forecast from $US90 a tonne to $US80 a tonne.
Its longer-term price projection is $US88 a tonne, landed in China. Given that iron ore costs about $US20 a tonne to rail, load and ship to the Chinese steel mills, the only local iron ore miners that will be clearly profitable at that price are Rio, which has a cash cost of about $US25 a tonne, and BHP, which has a cash production cost of about $US30 a tonne.
Fortescue has a cash production cost of just over $US50 a tonne, and would be somewhere either side of break-even, depending on how successful it is in offloading infrastructure assets, pulling its debt load down, and pushing its cash cost down as new lower-cost production comes on stream.
The junior iron ore miners would all be in a battle for survival. Goldman says the iron ore price will stay in the gutter until about 200 million tonnes of production is forced out by cutbacks and closures - and that even then, the best iron ore miners will be little more than utilities, focused on cash generation and dividends: not a rosy scenario for Australia's most important mining commodity.
Iron ore glut will send prices south
Iron ore exports totalled almost $31 billion in the first seven months of the current June financial year, and account for about a quarter of the nation's total merchandise exports.
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