Australia's highly profitable iron ore sector is expected to ride out market volatility as fears of additional COVID-19 lockdowns in China see a 10 per cent price drop to start the week.
The Australian share market lost $50 billion Tuesday and iron ore fell almost 10 per cent to $US135.75 ($188.81) per tonne.
Commonwealth Bank (CBA) director of mining and energy commodities research Vivek Dhar said the drop came as a result of COVID-19 lockdowns in China and what they could mean for demand of Australian ore.
"Markets are worried that Beijing in particular maybe exposed to more severe lockdowns, like what we've seen in Shanghai," he said.
Mr Dhar expected the next few months would see "demand weakness" from Chinese steel mills, which would likely drive the price lower.
Property and infrastructure key
China's key policy makers, its politburo, will meet for its April quarterly meeting this week.
Mr Dhar said the meeting should show what support measures China will invest in, which is likely to have further ramifications on iron ore.
"The key ones to keep an eye on … is whether we see the property sector see some easing credit conditions," he said.
"And the other aspect to keep a close eye on is the level of support for the infrastructure sector."
China's property and infrastructure sectors made up about 60 per cent of China's steel demand which was critical to iron ore price changes, according to Mr Dhar.
Another factor at play was an announcement by China last week that it planned to further reduce steel output, as it did in 2021.
"Prices went from a peak of $US233 per tonne in mid-May to $US87 per tonne in mid-November. The same potential impact is possible this year."
Australian production 'not at risk': CBA
Despite this latest price drop and expectations of further falls, the director of mining and energy commodities research did not believe Australian iron ore production was at risk.
The profitability of the iron ore sector was expected to continue through 2022.
"We sit very fortunately as the lowest cost producers of iron ore and, together with some Brazilian operations, I think that's going to be very profitable," he said.
"The cash generation is going to be significant."
Longer term, Mr Dhar anticipated the price would move between $US120 and $US160 per tonne during 2022, with the potential to drop to $US100 by the end of the year.
This year's federal budget forecast iron ore to fall to an average $US55 per tonne by the end of the September quarter.
For every $US10 per tonne increase, treasury analysis expects an increase of about $200 million to tax receipts in 2022-23, and $600 million in 2023-24.
