Treasurer Jim Chalmers has warned that falling iron ore prices, driven by challenges in China's construction sector, could lead to a budget shortfall of AUD 3 billion (USD 2 billion) over the next four years.

Iron ore prices have plummeted approximately 38% since the start of 2024, currently trading at around USD 81.80 per tonne, which is below the Treasury's forecast of USD 83 per tonne.

The Treasury had anticipated that iron ore prices would stabilize at a long-term average of USD 60 per tonne by March 2025, but if this occurs sooner, it could exacerbate the projected revenue decline.

China remains Australia's largest trading partner, with iron ore making up 18% of Australia's total exports last year, significantly contributing to tax revenues and mining profits.

The downturn in iron ore prices is largely attributed to weaker growth figures in China and a significant slowdown in its property sector, which has reduced demand for steel.

Baowu Steel Group, the world's largest steelmaker, has indicated that the downturn in China's steel industry could be more severe than previous downturns in 2008 and 2015.

Residential construction starts in China have dropped by approximately 60% from their peak in 2021, highlighting a significant contraction in the housing market.

Australia's economy is also feeling the strain, with GDP growth slowing to just 0.1% in the first quarter, down from 0.3% in the previous quarter.

Major Australian mining companies, including BHP and Rio Tinto, have seen their share prices fall significantly, erasing around AUD 100 billion in market value due to the declining iron ore prices.

In July, home prices in China fell by 8.2%, marking the sharpest decline on record and further contributing to the economic challenges faced by Australia.

Chalmers underscored the importance of cautious economic management in light of these developments, as the government has achieved back-to-back budget surpluses for the first time in nearly two decades.