End of the mining boom: iron ore’s price slump affects all Australians

THINK you are safe from the slumping iron ore price? Think again. The impacts are hitting more than just frustrated investors.

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A COLLAPSE in the iron ore price is affecting Australians more than they might think.

As the price of Australia’s biggest export hit fresh lows this week to the frustration of investors, economists said the impact was also felt in jobs, the Federal Budget, government services, retirement incomes and even home loan interest rates.

Global oversupply and shrinking Chinese demand have prompted critics to say you’d need rocks in your head to put money into iron ore, but others believe a turnaround may not be far away.

In the tangled world of government, finance and consumers, the effect on Australians’ lives is widespread.

THE BUDGET

AMP Capital chief economist Shane Oliver said the falling iron ore price — from $US180 a tonne in 2011 to $US40 today — impacted Australians on a number of levels and the Federal Budget was feeling the pinch.

Widespread impacts ... The falling iron ore price may be affecting you more than you might think.

“Each $1 hit on the iron ore price knocks about $250 million a year out of government revenue,” he said.

“That’s why every time there’s been a Budget update in the last few years, they are always worse than previous estimates.”

This intensified pressure on the government to find savings, through cuts to government services and welfare payments, or delaying projects, Dr Oliver said.

Baillieu Holst chief economist Darryl Gobbett said the government was losing company tax and personal tax revenue as the excesses of the mining boom disappeared. “Geologists aren’t earning $300,000 a year anymore,” he said.

Plunging ... The iron ore price has slumped almost 80 per cent in four years.

JOBS

CommSec economist Savanth Sebastian said miners’ heavy job cuts were flowing through to support businesses and mining towns.

“September quarter business investment recorded the largest fall on record, dominated by the pullback in mining investment,” he said.

INTEREST RATES AND DOLLAR

It’s also affecting mortgage interest rates and overseas holidays. Mr Sebastian and Dr Oliver said the weakness in iron ore and other commodities had kept interest rates low and helped push the Aussie dollar down.

“When iron ore was $180 per tonne the average Australian was paying a much higher interest rate, and jobs were at risk then because imports were so cheap,” Dr Oliver said.

“Now that the mining boom’s gone away, parts of Australia that were suppressed by the high iron ore price are bouncing back.” Construction activity had improved, interest rates were low and overseas tourists and students were coming back, he said.

INVESTORS

Australia’s two big listed iron ore producers are suffering, with BHP Billiton slumping 36 per cent and Rio Tinto down 25 per cent in the past year.

The slide has not yet spread to their dividends, which are paid in US dollars and have climbed because of the falling Aussie dollar.

“The risk now is that BHP does cut its dividend, and that does have an impact,” Mr Sebastian said.

The boom is over ... Some economists say there is no potential catalyst for the iron ore price to bounce back.

RETIREES

Most Australians invest in iron ore indirectly through their super funds, while many retirees have direct shareholdings.

“The longer the iron ore price remains low, the impact is more profound for retirees who receive the dividend income,” Mr Sebastian said.

Retirees also are affected by low interest rates, which have more than halved the income they receive on bank deposits.

OUTLOOK

Mr Sebastian said there was not likely to be a lift in the iron ore price soon, while Dr Oliver said he believed it was within $10 of the bottom.

BetaShares chief economist David Bassanese said the price was heading lower amid further supply increases in Australia and Brazil.

“I would worry about jumping into the sector at the moment. There’s more downside to come on the commodity side and it’s hard to see a catalyst to turn things around,” he said.

“People thought it would stabilise at around $50 but it’s broken into the low $40s, and the target for next year could well be $25 or $30.

BHP and Rio better placed than most producers but “they’ll still get caught in the negative swirl of sentiment”, Mr Bassanese said.

Mr Gobbett said BHP’s share price today looked like good value for investors taking a three-to-five year view “because of the quality of the assets they have” and the fact the company was leaner after cutting costs.