China‘s steel industry crisis and a crackdown on its debt-ridden property developers will deliver a powerful blow to the Australian economy, costing the government $3billion in Budget revenue.

Treasurer Jim Chalmers has released new analysis on the weakening Chinese demand for iron ore, which will significantly reduce the value of Australia’s biggest export and thereby reduce mining company tax receipts over the next four years.

‘We’re following these developments very closely because of their potential impact on our economy and our Budget,’ he said.

‘Softness in the Chinese economy and the recent fall in iron ore prices are another reminder that we are not immune from volatility and uncertainty in the global economy.’

The Budget predicted iron ore prices would almost halve to just $US60 a tonne by the March quarter of 2025, down from levels then above $US100 a tonne.

By the close of trade on Thursday, iron ore had fallen to $US81.80 a tonne, hitting levels unseen since late 2022, as China bought less of the commodity used to make steel.

That was below the $US83-a-tonne level Treasury had predicted for August 2024, demonstrating how economic weakness in China – due to falling demand for apartments – will be felt in Australia for years to come.

Every $US10-a-tonne fall in iron ore prices equates to a $500million loss in potential government revenue and prices since the start of 2024 have plunged by 38 per cent.

Iron ore prices have collapsed by 7.5 per cent during the past week alone after China’s Baowu Steel Group, the world’s biggest steelmaker, warned the industry downturn was worse than expected.

Hu Wangming, the corporate giant’s chairman, told Baowu’s half-year meeting the results were ‘more difficult to endure than we expected’.

This steel crisis is occurring just six months after a Hong Kong court ordered the liquidation of apartment building giant Evergrande, with developer Country Garden also in danger.

Vivek Dhar, the Commonwealth Bank’s director of mining and energy commodities research, said Baowu Steel’s comments had frightened financial markets.

‘Margins are very, very low and at negative enough levels where that comment is like, “Wow, the steel sector’s haemorrhaging”,’ he told Daily Mail Australia.  

Mr Dhar said the drops in demand for steel – and therefore Australian iron ore – ‘have really accelerated since Evergrande.’

Apartment building had made up 30 per cent of China’s steel consumption, and that was exacerbated by a slowdown in construction of transport infrastructure.

‘Weak steel demand has put enormous pressure on steel prices,’ he said. 

‘Markets are letting go of the hope of stablisation in the property sector.

‘Problem two is infrastructure-related steel demand is often your offset for a deteriorating property sector – that has actually started to turn south as well.’

As recently as April, the Reserve Bank of Australia was hopeful Chinese infrastructure spending would make up for the halving in demand for steel used to build high-rise apartment towers, compared with the peak in 2019.

‘Despite this, overall demand for steel in China has remained resilient, due mainly to strong growth in both infrastructure and manufacturing investment,’ it said.

‘In the near term, it is likely that infrastructure and manufacturing investment will continue to grow, with the support of fiscal and preferential lending policy measures.’

In 2020 Chinese President Xi Jinping’s Communist Party government acted on the glut of new apartment buildings which had created ‘ghost cities’ of empty towers. 

Oversupply had seen property prices plunge, with the Chinese National Bureau of Statistics showing a 4.9 per cent drop in the year to July.

Existing homes did even worse, with values plummeting by 8.2 per cent over the year, even though residential construction starts are 60 per cent below the peak of 2021.

Anthony Albanese is the first Labor prime minister since 1989 to have presided over two consecutive Budget surpluses.

But the $9.3billion surplus for 2023-24 was based on high iron ore prices boosting company tax revenue.

A Budget deficit of $28.3billion was forecast for 2024-25, growing to a $42.8billion deficit in 2025-26.

Weaker company tax revenue from iron ore shipments to China is set to mean bigger Budget deficits than Treasury had anticipated unless there were severe cutbacks in government spending. 

Treasury quotes iron ore prices before freight costs are factored in, which are typically about $US10 a tonne below the figure with transport costs included.