Western Australia is accustomed to the up-and-down cycle of mining, which forms the basis of the state’s economy.
But should Western Australians be concerned if the price of the state’s biggest source of revenue falls faster than expected?
The German finance minister warned this week that falling iron ore prices due to the slowdown in China’s real estate market could cost the federal government $3 billion in revenue due to lower tax revenues from iron ore exports.
WA Treasurer Rita Saffioti said the prospect of price cuts was far from ideal.
“We are not very happy with this prospect,” she told reporters on Monday.
But after years of astronomical iron ore prices that left the state’s coffers healthier than ever, Ms Saffioti said the Western Australian Government had budgeted accordingly for the future.
According to Rita Saffioti, the state government has kept its price estimates conservative. (ABC News: Andrew O’Connor)
“You always have to plan for the worst case scenario in a sense because you have to make sure you are prepared for all scenarios and that’s what we did,” she said.
Conservative estimates are intended to cushion the setback
Iron ore royalties are the largest contributor to WA’s budget outcome, amounting to about $10 billion in the last financial year, following similar levels of revenue in the previous two financial years.
Iron ore prices have fallen by about 38 percent since the beginning of 2024 and have fallen by 7.5 percent in the last week alone.
The price of iron ore was around $143 per tonne at the beginning of the year, but has fallen steadily throughout the year.
But Western Australia’s Treasury has been preparing for a decline for some time, basing its current budget on a long-term average price of $71 per tonne.
The Government of Western Australia has learned from the experiences of previous governments and has kept its price forecasts conservative for years to protect itself against price shocks.
“There is always criticism when we publish our budgets with very conservative estimates, but the conservative estimates allow us to cushion these fluctuations,” Ms Saffioti said.
Aaron Morey, chief economist at the WA Chamber of Commerce and Industry, said the importance of iron ore should not be underestimated, but he was confident the state was well placed to weather a price collapse.
Aaron Morey says WA’s overall economy is “still very strong”. (ABC News: Cason Ho)
“Undoubtedly, the lower iron ore prices fall, the greater the budget impact,” he said.
“There will be disruptions in the coming years if there is a significant slowdown in the Chinese economy, but overall our economy is still very strong.”
The pressure to diversify
For years, state governments have talked about the need to move away from iron ore and “diversify” Western Australia’s economy.
Daniel Kiely, research fellow at the Bankwest Curtin Economics Centre, said the process could take decades.
Daniel Kiely says economic diversification will not happen overnight. (Delivered)
“Rome wasn’t built in a day… It’s not just about diversity, diversification of products and services. It’s also about opening up new markets,” said Dr Kiely.
According to Dr Keily, iron ore accounts for over 50 per cent of WA’s export value in royalty terms and is worth 15 per cent of total national export value.
He said the key to diversifying the mining state’s economy was reducing dependence on a single commodity and export destination.
“We have, so to speak, put all our eggs in the Chinese basket and, in the iron ore issue, we see that falling prices pose an enormous risk for us,” he said.
To avoid market-related price fluctuations, investments in domestic processing and manufacturing are essential, he said.
Dr Kiely described the energy transition as a great opportunity for economic diversification and pointed to the positive steps that governments have already taken at both federal and state level.
Possible silver lining
Perth developer Jason Janssen said falling iron ore prices could prove a boon for Western Australia’s property market.
“Some workers who work in mining in the north will come back and do their jobs here in Perth,” he said.
Jason Janssen says WA’s residential housing sector could benefit from falling iron ore prices. (ABC News: Rhiannon Shine)
“This means we can build houses faster and hopefully control prices a little better.”
“When there is a shortage of available labor, there is little control over prices. It is determined by supply and demand.”
Joe White, president of the Real Estate Institute of WA, said that while house prices would not plummet, the introduction of additional workers could ease some of the pressure on the market.
“We can return to a natural employment pattern where we no longer have all the attraction focused on one area,” he said.
“Then we can also take care of other needs of society, such as construction work, civil projects, road construction and the like, for which we can also provide manpower.
“I think it will ultimately probably lead to a more sustainable economic growth pattern.”
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