There is a lot going on in the world — the war in Ukraine, global share markets tanking, the lingering impacts of COVID-19, interest rate rises, an east coast energy crisis and $12 lettuces just to name a few.

You would be forgiven for thinking we are being hammered from all sides.

Amid all this chaos there is another potential sleeper which could have a significant impact on the biggest companies operating in WA and the State’s coffers.

Last month there was renewed speculation that China is seeking to assert more control over the price the country’s steel mills pay for iron ore.

Now the mills individually negotiate pricing direct with the producers, but the drums are beating that the Chinese Government wants to move to a collective mechanism to determine price.

I think we can safely assume they will not be wanting to pay more.

With WA exporting more than 900 million tonnes of iron ore last year, 82 per cent of it went to China and the State Government banked more than $12 billion in royalties.

So continued talk about collective bargaining by the steel mills is likely to make the iron ore producers and WA’s Treasury boffins nervous.

Our big three iron ore producers — Rio Tinto, BHP and FMG — have to contemplate the potential of a game of chicken with the steel mills.

Can they take their own collaborative approach, or will they go it alone on price?

And could this concept of collective bargaining be a test case for other industries here?

Economies across the globe need critical inputs for both their growth and to meet existing demand and China has one of the biggest appetites.

Lithium, nickel and copper fit that bill, and like iron ore, Western Australia is a key producer.

The big iron ore companies still have clout but for emerging and future producers of commodities such as lithium, a collective bargaining model could see them become price takers.

In the turbulent times of supply chain disruption and geopolitical tensions (take Ukraine wheat and Russian gas as examples) a key lesson has been the need to develop multiple markets from both an import and export perspective.

Why should we care about this?

Even a $10 downward price adjustment on iron ore would create much more than a ripple given the super-sized tonnages leaving our shores.

It has been reported that for every dollar increase in the iron ore price, WA receives on average $83 million more in royalties.

A $10 haircut on the agreed price with Chinese steel mills across the board would therefore reduce the State’s revenue stream by more than $800 million.

The impact for West Australians may not be as personal or immediate as rising mortgages or the cost of your weekly shopping but a lower iron price coordinated by Beijing has the potential to reduce royalty revenues for the longer term.

And that will mean the Government will have less up its sleeve to spend on schools, hospitals and roads.

There really is so much going on.

This article first appeared in The West Australian on Friday 8 July 2022.