Iron ore price drops: ASX plunges 2 per cent as Evergrande fears grow

Australian investors endured a brutal day after the stock market fell to a fresh eight-month low and the price of iron ore plunged.

There was $50 billion wiped off the Australian sharemarket on Monday as the iron ore price collapsed, while global markets were spooked by fears that one of China’s biggest property developers could go under.

The iron ore price dropped to $US90 a tonne, down by 60 per cent since its all record high in May.

The price fell 4.9 per cent to $US101.30 at the weekend, according to the ANZ morning research report.

The price is now well below its peak, set only four months ago.

The drop has huge implications for Australia’s finances.

According to the 2021-22 federal budget, for every $US10 the price of iron ore falls, nominal GDP decreases by $6.5 billion and the budget coffers are drained of $1.3 billion.

Although, increased demand for Australian coking coal has helped soften the blow somewhat.

Overall the ASX 200 is down 150 points or about 2 per cent today, the worst day since February 26.

This aerial photo taken on September 17, 2021 shows a housing complex by Chinese property developer Evergrande in Huaian in China's eastern Jiangsu province. Picture: STR/AFP

It comes as one of China’s largest property developers China Evergrande Group - a voracious user of iron ore - edges to the brink of default on hundreds of billions of dollars of debt. The iron ore price plunge has also been blamed on China’s move to cut steel production in a bid to slow pollution.

The price of iron ore has matched the fortunes of Evergrande, which one expert described as being in a “death spiral” recently.

Evergrande vs Iron Ore. No dip buyers there @AlessioUrbanpic.twitter.com/d36yWz0wnb

— Gianluca (@Theimmigrant84) September 20, 2021

A drop in Chinese demand could have a two-fold impact on the Australian economy.

Firstly, it would likely push down prices. Evergrande is the world’s largest importer of iron ore.

There are also concerns Chinese investors who own Australian property could liquidate their assets to cover their losses.

The property developer’s prospects of weathering the current liquidity crisis is dire, Chinese state media reported.

It owes $US300 billion to creditors and has contracts to build as many as 1.6 million apartments, according to the New York Times.

Its shares have plunged more than 80% this year.

Anxious investors protested outside the company’s headquarters last week, demanding answers from the company.

Police with riot shields were deployed to maintain order, according to AFP reporters at the scene.

People gather outside the Evergrande headquarters in Shenzhen on September 14, as the Chinese property giant said it was facing "unprecedented difficulties". Picture: AFP

Police keep watch outside the Evergrande headquarters. Picture: AFP

Evergrande was downgraded by two credit rating agencies last week while its shares tumbled below their 2009 listing price, with a barrage of bad headlines and speculation of its imminent collapse on Chinese social media.

On Monday, the company insisted it would avoid bankruptcy.

But on Tuesday, it issued another statement to the Hong Kong stock exchange, saying it had hired financial advisers to explore “all feasible solutions” to ease its cash crunch.

It’s unclear if the Chinese government will bail out the company.