Australia steeled for China slowdown as iron ore prices fall – by Jamie Smyth (Financial Times – April 16, 2015)

Sydney – The last time Western Australia was engaged in a dispute with Canberra of this magnitude, it threatened to secede during a financial crisis sparked by the 1930s Depression.

The current friction is linked to China’s slowdown — a sign of how closely Australia’s fortunes are tied to Beijing’s appetite for its commodity exports.

“It’s not secession but it is tension and disengagement,” Colin Barnett, Western Australia’s premier, said this week when Canberra and other states rejected a request to help plug a widening hole in the state budget caused by plunging iron ore prices.

Western Australia is a mining state that enjoyed a decade-long boom selling iron ore — a key ingredient in steel — to China. Known by some as “China’s quarry”, the state hosts BHP Billiton, Rio Tinto and Fortescue Metals Group, which have spent billions of dollars building mines, railways and ports to almost double iron ore production to 717m tonnes over the past five years.

But just as global supply hits record levels, China’s economy is slowing and its desire for the reddish-brown ore may have plateaued. Since peaking at US$190 in 2011, iron ore prices have slid more than 70 per cent to about US$50 a tonne. This is denting tax revenues, forcing smaller mining companies to close and lay off thousands of employees.

“Western Australia was the big beneficiary of the China boom,” says Chris Richardson, economist at Deloitte Access Economics. “But it is suffering now as the mine construction phase ends and commodity prices fall amid a surge in iron ore supply and faltering demand.”

In 2013 the state lost its triple-A credit rating. On Tuesday, Standard & Poor’s warned it may face a further downgrade because of its budget problems.

Western Australia says that if iron ore prices stay at US$50 per tonne it would wipe out A$4bn (US$3bn) in projected royalty revenues in 2015-16 — 12 per cent of the state budget.

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