Why is Iron Ore so Important to the Australian Economy?

It really isn’t too much to say that iron ore is one of the main pillars that the Aussie economy rests upon. And when global financial markets crashed back in 2008, the iron ore pillar remained steadfast, keeping Australia afloat.

Of course, we did feel some residual effect from this worldwide disaster. It would have been impossible not to. But our slowdown was much less significant, and we bounced back a lot quicker than the rest of the world.

At the height of the Global Financial Crisis in 2009, where central powers like the US and the UK were plummeting uncontrollably, Australia managed to grow its economy by 1.8%.

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We Have Iron Ore to Thank

The reason for this positive result is the way our economy is structured. Our commodity sector dominates over our manufacturing sector. In short, we are more about trading resources than other sectors, such as technology.

‘Our land abounds in nature’s gifts’…and we make money from them.

So in 2008–2009, when front-running global banks were collapsing left, right and centre, Australia was comparatively unaffected. Our valuables were securely kept within our golden soil, rather than tied up in institutions.

And it just so happened that China — one of the hungriest consumers of our rich supply of iron ore — also managed to get back on their feet relatively quickly in the midst of the GFC.

In 2008, China was responsible for AU$32 billion — nearly 15% — of our exports. It marked an eight-fold increase in 10 years.

Needless to say, our mining and resources industry saved us. Particularly iron ore. And it continues to do so to this day.

iron ore

Stacks of Iron Ore

Australia is the largest producer of iron ore on the entire planet. Australia extracts 28% of the world’s iron ore that is fit for profitable production. Our Pilbara region in Western Australia accounts for most, if not all of this. Our yields are double that of Russia, who are next in line with a 14% stake in global iron ore extraction. 

In 2010, the metal outranked coal as Australia’s most valuable export by over $4 billion.

The production and exporting of iron ore is one of the largest contributing factors to our economy. Since 2005, it’s pretty much maintained an upward climb in terms of the returns it brings to our country.

Back in 2014, iron ore export revenues equated to $75 billion, the biggest they have ever been. This provided a major source of income for the country. While it hasn’t reached this amount since, figures are still stable. In September of 2018 iron ore export revenues were just shy of $65 billion.

And Australian iron exporters are taking measures to ensure this revenue stays high. Investment is going towards keeping extraction and processing costs low so we get the most bang for our buck. Or rather, the most income from our iron ore.

Because it costs us so little to extract, we can trade iron ore at competitive prices, adding further appeal to Australia’s iron ore yields.

Who Wants it, and What For?

The most common usage for iron ore is in the steel-making process. And as steel is a base material for different infrastructures like transport lines, housing, factories, machinery and even electricity supply networks, it’s no mystery as to why the demand for iron ore has remained stable.

As an economy that has been hell-bent on infrastructure booms, China has been the biggest importer of iron ore, taking in 66% of the world’s iron ore stock. They’ve also had a relatively large steel-making sector of business, which has contributed to these high demands.

Of course, as China makes efforts to move from an investment-led economy to a more consumer-led economy, loss-making business ventures will be cracked down upon. And as the steel-making sector hasn’t been huge on the profits, it’s coming under the chopping block.

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While this is certainly a spanner in the works, by no means does it suggest the end of our strong iron ore mining industry. With such a large abundance of the raw material, of which is predominately high-grade, iron ore looks like it will remain a front-runner amongst Australia’s economic drivers.

bhp

Our Major Miners Dominate

Our mining sector — which is propelled by iron ore — accounts for 15% of our gross domestic product (GDP). We can’t deny how imperative this contribution is to our success as an economy.

Equating this to a dollar value, a Deloitte report found that the mining sector in all of its aspects (technology, equipment, service etc) contributed $236.8 billion in 2015–2016.

We have a big three when it comes to the Australian mining sector; Rio Tinto [ASX:RIO], BHP [ASX:BHP] and Fortescue Metals [ASX:FMG]. Every single one of them appear on the list of Top 40 global miners, with BHP and Rio Tinto holding first and second place since 2016. These, along with our other mining companies, provide about 10% of the nation’s overall employment — that’s around 1.1 million jobs coming from our mining sector.

It can’t be made clearer that iron ore is an integral piece in the path to a growing Australian economy. It would be foolish, as a potential investor, not to stay well informed about what this resource is up to.

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