Countdown to Impact: China, Iron Ore and Australia’s Coming Economic Shake-Up

In Brief

Around 80% of demand for Australia’s leading export, iron ore, comes from China yet it is under pressure from shifts within China, global geoeconomic tensions and the diminishing quality of Australia’s Pilbara iron ore reserves
The expected November 2025 entry of Guinea’s high-grade Simandou iron ore into world markets is forecast to further pressure Australia’s leading export, and is underpinned by China’s long standing political-economic closeness to Guinea
These pressures risk undermining Australia’s prosperity and already-strained fiscal resources, alongside adding uncertainty to China-Australia relations
Ahead of Prime Minister Albanese’s late-2025 visit to China, the Prime Minister and his team should prioritise the necessary policy and regulatory reform decisions to ensure the visit takes place on a strong and far-sighted footing.

In 2025, some $117 billion worth of iron ore exports are set to leave Western Australia’s Pilbara region for international markets, with around 80% being China-bound. This makes iron ore not only the source of some 20% of Australia’s export revenues but also the crux of the nation’s stable and prosperous trade ties with China. Two announcements from mining giant Rio Tinto in May, however, point to elevated uncertainty for both Australia’s iron ore-linked export revenues and, hence, the balance of trade ties with China.

Two announcements by Rio Tinto mark 2025 as a turning point for Australia’s iron ore dependence

The first announcement from Rio Tinto was made to its mostly East Asian iron ore customers, stating that its two-decade flagship “Pilbara Blend Fines” benchmark product was being permanently downgraded, now characterised by lower average iron content than in the past. In practice, this equates to each tonne of iron ore being expected to contain 60.8% iron in place of the earlier 61.6% iron. However, that incremental difference adds up to a significant cost and energy differential at the point of steel production. Moreover, Rio Tinto’s announcement follows a similar announcement by BHP in 2024. Taken as a trend, this is destined to manifest into lower received prices and an inevitable fiscal hit for Australia’s Treasury departments and a broader impact on economic growth.

Second, Rio Tinto informed markets that it expects to ship its first iron ore from its co-invested, massive, high-grade iron ore deposit, known as Simandou, in Guinea, West Africa, in November. At a time when Pilbara miners have permanently downgraded their iron content forecasts, the world’s largest high-grade untapped iron ore source, Simandou, is set to enter global markets. Once operational, Simandou is forecast to supply around 120 million tonnes of iron ore annually. Although these volumes are not comparable to those from the Pilbara, Simandou’s higher-quality iron ore is not only of strategic importance to China’s low-carbon, high-quality steel-making aspirations but could still be sufficient to reshape global pricing and supply dynamics. Simandou’s ore has an average iron content of around 65% Fe (iron), versus Pilbara’s ore which has dropped to around 60.8%. Simandou’s high-grade ore is not only richly hematite (an iron oxide mineral that is one of the main sources of iron for steel production), but is also low in impurities such as silica, phosphorus and sulfur.

Export of Australian iron ore to China — A ship being loaded with crushed ore for export. Port Hedland. Photo by Dazman

Surely higher shipping costs from West Africa will ensure Australia's iron ore advantage?

The cost of shipping iron ore from Guinea to China is expected to vary and is considerably higher than shipping iron ore from Port Headland, Western Australia. According to the Australian Financial Review, freight costs from Australia are around US$7.80 per tonne, whereas from Guinea this ranges from US$21.50 to $US23.50 per tonne. Despite this gap there are some noteworthy reasons why China might prefer to ship iron ore all the way from the far west of West Africa.

First, Simandou’s ore quality. The elevated iron content and lower impurities content are more valued given China’s aspirations for green steel production - that is, lower-emissions steel production. Steel is made by removing oxygen and other impurities from iron ore, and then the iron is combined with carbon, recycled steel and small amounts of other elements to become steel. The energy-intensiveness of that process and scale of demand for steel mean that iron ore processing and steel manufacture produce some 7% of global greenhouse gas emissions, and 11% of global carbon dioxide emissions. China accounts for at least half of the world's annual steel output—approximately a billion tonnes per year. Moreover, with its commitment to peak CO₂ emissions before 2030 and achieving carbon neutrality by 2060, every step toward less energy-intensive steel production plays a measurable role in realising these ambitious environmental goals. China is taking many steps to reach these goals, including utilising more scrap steel in steel production, and shifting production methods away from coal-fired blast furnaces to electric arc furnaces that tend to be powered by renewables-linked electricity. The latter work far more efficiently with high-iron-content and low-impurity-ore – which Simandou offers the greatest quantities of.

Second, this is an era of geoeconomic tensions, supply chain diversification and friend-shoring - for China too. It happens that West Africa’s Guinea, home to Simandou, is one of China’s longer-standing friends in the Global South. After gaining independence from France in 1958, Guinea became the first country in sub-Saharan Africa to recognise the People’s Republic of China in place of the Republic of China (Taiwan), in 1959. Guinea has not deviated from that position since. In December 1963 when Premier Zhou Enlai made a historic tour of Africa to foster ties between the People’s Republic of China and the continent, Guinea was one of just 10 countries on Premier Zhou’s itinerary.

More recently, when Guinea and neighbours Liberia and Sierra Leone were emerging from the worst of the devastation of an Ebola virus outbreak in 2015, the first foreign minister to visit the sub-region was none other than China’s Foreign Minister Wang Yi. He promised the three nations, among the least-developed countries in Africa, that China would support them to re-build a more prosperous ‘post-Ebola’ future. Development of Simandou’s resources has potential to make a significant contribution in the direction of that promise, and Chinese firms hold more than half the interest in the consortium unlocking the nation’s iron ore.

Third, shipping is built into the deal, as a Singaporean shipping conglomerate, Winning International Group, is part of the Simandou consortium. Not only is Winning already involved in shipping Guinea’s world-class and world market-shaping bauxite reserves around the world, but the company has broad interests in ship ownership and operation, as well as maritime transhipment, mining and railways. Adding high-grade iron ore to its mostly Asia-bound shipments from Guinea is unlikely to be challenging for Winning.

How will the entrance of Simandou’s ore impact Australia and Australia-China relations?

Iron ore makes up some 20% of Australia’s total exports annually, and around $20 billion to the nation’s tax revenues. Even a marginal price hit to this share of exports will hit the economy and the Treasury hard. One estimate by the Federal Treasury is that a theoretical $US10/tonne fall in iron ore prices would cut tax receipts by $400 million in the year ahead and cut gross domestic product by $5.2 billion. Any more substantive near-future shift from Pilbara’s iron ore to Simandou’s by China would leave Australia in a far more precarious position.

Given this global iron ore backdrop, what should be on Albanese’s agenda leading up to and during his visit to China?

Earlier last century, Australia was said to have ridden its economic prosperity on the sheep’s back. Over recent decades, Australia has arguably done the same on the Pilbara’s back. If that source of economic security comes into question, what next? Some argue that Australia can sell cleaner iron ore to China and do this using renewable energy. Another argument is that Australia should produce steel itself, again drawing on its potential to be home to ample, affordable renewable energy. There are also calls to pivot to other minerals, fuels and new export markets and destinations.

The Superpower Institute, a leading Australian energy-related think-tank, has tangibly evaluated Australia’s prospects of becoming a green steel manufacturing giant and exporter, as detailed in the Institute’s recently published report, "A Green Iron Plan for Australia: Securing Prosperity in a Decarbonising World". The Institute is pushing for production tax credits of $170/tonne, plus grants covering 30% of the investment costs as well as other taxpayer support, to transform Australia into a green iron production leader accordingly. It argues that these measures would unlock a $400 billion export opportunity and so avoid the risks around iron ore exports, as set out herein.

A parallel call was made by Rio Tinto, which claims that Australia’s regulatory environment is not fit for any green steel transition or a sizeable pivot to new mines and mineral exports. Rio Tinto argues that for Australia to have any hope of being competitive in such areas, it would be necessary to provide operational clarity and policy certainty, as well as more investor-friendly regulations.

What is clear is that the days when Australia could ride without care or competition on the Pilbara’s back would seem to be imminently over. Therefore, ahead of the Prime Minister’s official visit to China later this year, he must ensure that his team has resoundingly navigated the complex landscape, that is, both Australia’s iron ore industry as well as the interests and ideas of those for advancing it in greener directions or for alternative export markets. Only in this way, given broader global and industry changes, will he head to Beijing on a sure footing.