The mining sector is one of the primary drivers of the island country’s economy, and Australia’s iron ore production is often cited as the global steel industry’s backbone.
As geopolitical tensions are reshaping the global supply chain, Australia, like all other countries, is also looking to diversify its trade relations while simultaneously pursuing self-reliance. The world is experiencing a polarising trend in which countries are adopting more protectionist policies while also attempting to forge new trade dynamics. This is undoubtedly a consequence of US President Donald Trump’s tariff policies, and the rest of the world has no choice but to explore other markets while still maintaining key partnerships with the US.
The mining sector is one of the primary drivers of the island country’s economy, and Australia’s iron ore production is often cited as the global steel industry’s backbone. In 2023-2024, Australia’s mining and metals exports were AUD $301.7 billion, a 2.9% increase that shows that demand is still strong worldwide even in the face of economic uncertainty.
Australia‘s most valuable mineral export, iron ore, brings in between AUD $80 and AUD $90 billion a year. This amounts to around half of the 900 million tons of iron ore produced worldwide, as the country is home to the largest international iron ore reserve. When it is taken into account that this output directly contributes to the expansion of global infrastructure by helping to make steel, the magnitude becomes much more significant.
Australia is also one of the largest exporters of LNG worldwide. However, in December 2025, news broke that demand for Australian gas was falling domestically and across Asian markets. According to the Institute for Energy Economics and Financial Analysis (IEEFA), LNG exports fell to a four-year low in the first six months of 2025, reflecting a broader regional trend. Asia also reported its largest half-year decline since 2010, with LNG imports down 9% YoY, and China’s imports alone accounting for a 21% drop.
For Australia, particularly, this is a tightrope, because while China remains one of its biggest trading partners, the tensions rising across the Indo-Pacific region, especially concerning Taiwan and the South China Sea, Australia is left with no choice but to build up its economic resilience, as it balances its relationship with both Beijing and Washington.
After a short period of tension, involving bans and sanctions on China, Canberra authorities are now working alongside Beijing officials to rebuild the relationship between the two countries. Both countries have opened up opportunities for collaboration in clean energy, trade, climate action, AI and healthcare, amongst others.
Despite China’s live-fire drills in the Tasman Sea in 2025, Australia has chosen to avoid escalating the situation, prioritising stable relations. But the government is concerned that demand for Australian imports is decreasing in Asia’s biggest economy. China’s declining economic momentum, growing debt, real estate problems, and ageing population are the reasons for contracting demand. China’s investments in housing, manufacturing, and infrastructure, all of which are currently under structural strain, have contributed significantly to Australia’s recent increase in export vulnerability.
In order to lessen their susceptibility to US tariffs, multinational corporations are progressively moving their production from China to Southeast Asia and Mexico. The flow of Australian inputs that previously passed through China before reaching other markets is being reduced as a result of the ‘China + 1’ phenomenon.
While manufacturing and outbound shipments have taken a hit, Australia’s service sector, on the other hand, reported the highest activity since 2022. According to the adjusted S&P Global Australia services PMI, the business activity index was 56.3 in January, up from 51.1 in December. The highest since 2022, when it was recorded to be 56.0.
The data also showed that incoming businesses grew at a faster pace, the rate of employment increased, and there was a reported growth in new orders, which accelerated for a third consecutive month to the fastest since April 2022.
Inflation was also favourable at 3.4%, hovering well above the Reserve Bank of Australia’s (RBA) target band. However, pressure remains on the central bank to potentially hike interest rates further. The Consumer Price Index (CPI) remained unchanged at 3.8% in January. Economists have predicted that more rate hikes are yet to come this year.
While these indicators show the economy in an uptrend, there are also some grave problems Australia must contend with. The housing market risks in the country are on the rise, with the IMF earmarking Australia as the second most risk-prone country with regard to the housing market out of 27 countries in 2022. As per the Fund’s report, economies with high levels of household debt and a large share of debt issued at floating rates are straddled with higher mortgage payments and are at a greater risk of experiencing defaults.
However, the Australian housing market is showing signs of recovery since interest rates began climbing four years ago. The speculation that the central bank could raise interest rates is shaking the public’s confidence in the housing market’s stability.
Monetary policy certainly has a bearing on the behaviour of all economic sectors, domestic and international. While the RBA has agreed to hold the cash rate at 3.6% in December 2025, inflationary pressures continue. Despite rate hikes already causing market disruptions, it remains certain that the central bank is bound to confirm this move, as inflationary pressures emerge.
Australia is now at a crucial juncture, navigating the turbulent geopolitical world. Countries looking inwards to protect their interests, while also finding new avenues for partnerships. Due to record iron ore exports, the mining industry is still a powerful anchor for Australia, but the dramatic drop in LNG demand indicates that long-standing reliance on trade is fading. In addition to managing internal issues like ongoing inflation and weaknesses in the housing market, the country must now strike a balance in its security ties with its main export markets.
Nonetheless, there is some hope for a more resilient and varied economy given the recent growth in the services sector. Australia must effectively close the gap between its historical industrial strengths and a future that is becoming increasingly service-oriented and geopolitically complex if it hopes to prosper going forward.
