Iron ore, China and the Australian dollar

Australia’s largest export

Iron ore is the main ingredient in steel, and Australia is the world’s largest exporter of it, almost all from the Pilbara in Western Australia. In most years it is the country’s single most valuable export, and China buys the large majority of it.

What moves the price

Because China makes over half the world’s steel, Chinese demand sets the tone. The price tends to rise when Chinese construction, infrastructure and manufacturing are growing and steel mills are restocking, and to fall when China’s property sector slows or Beijing limits steel output. Supply matters too: weather in the Pilbara, cyclones that close ports, and new mines in Brazil and Africa.

Prices quoted in news reports are usually for ore delivered to Chinese ports, in US dollars a tonne. FinVolio’s iron ore price is the IMF’s monthly average, which arrives with a lag; the RBA’s bulk commodity index combines iron ore with coal and gas.

How it reaches you

Mining shares. BHP, Rio Tinto and Fortescue together make up a large part of the ASX 200, so the iron ore price moves the whole index and the super funds that track it.

The federal and WA budgets. Higher prices lift company tax and royalties. Budgets usually assume a conservative price, so a strong market can produce surprise windfalls, and a weak one a gap.

The Australian dollar. Strong export prices raise demand for Australian dollars, so the currency has tended to rise and fall with iron ore and with sentiment about China. The Australian dollar in yuan and the trade balance show the connection from different angles.

The concentration risk

Relying on one commodity and one buyer has served Australia well through the long Chinese building boom. It also means a slowdown in Chinese construction reaches Australian incomes, the budget and the dollar quickly. That is why investors watch Chinese property and steel data as closely as Australian figures.