With China accounting for up to 75 per cent of the world’s iron ore imports, Australia's most valuable export commodity has been hit hard by new policies introduced by the country, including cutting steel outputs.

Australia made a record breaking $A149 billion from iron ore exports last financial year as its price surged, but the economy could be set to miss out on the boom as China makes moves to cut its reliance on iron ore.

China’s policymakers have flagged that they are looking to keep the country’s steel production in 2021 at 2020 levels in order to reduce emissions, said Commonwealth Bank’s mining and energy economist Vivek Dhar.

“For China to achieve that goal, crude steel output needs to fall 12.2 per cent a year from August to December. In July, China’s crude steel output contracted 8.4 per cent a year, signalling that output cuts are not just being talked about, but happening,” he told news.com.au.

“Demand conditions in China’s property and infrastructure sectors have also weakened, reaffirming market anxieties that China’s steel output cuts for the remainder of the year are inevitable. The infrastructure and property sectors account for 20-25 per cent and 25-30 per cent of China’s steel demand respectively.”

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In Brazil, following a fatal dam collapse in January 2019 at one of its iron ore operations, production dramatically dropped causing prices to soar, he added.

But now iron ore supply from Brazil is expected to increase by 0.8 per cent in 2021, however the big impact to prices is not expected to hit until next year, Mr Dhar said.

It’s major operation is expected to increase iron ore output by between 3 and 3.5 per cent, he added.

“That’s why we believe Brazil will have a bigger impact on iron ore markets in 2022 given the supply increase is expected to be far more substantial,” he said.

With the Winter Olympics also expected to kick off in February 2022 in China, there are fears this could also cause substantial drops in demand for iron ore and have a knock on impact on price.

“Steel output restrictions to ensure clean air in Beijing in February is also a likely policy move,” Mr Dhar predicted.

“We’ve seen these restrictions applied in the past when Beijing celebrates major occasions. These cuts are often limited to North China – especially the steelmaking hub of Tangshan, which accounts for 14 per cent of China’s crude steel production.”

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However, he noted the Winter Olympic’s coincides with the Lunar New Year holiday period, which sees workers return to their home cities and activity reduce drastically.

“China already implements cuts to steel and other heavy industry production during the winter months in North China because that is typically when air quality levels deteriorate seasonally,” he added.

“These cuts are typically implemented from mid-November to mid-March, with exemptions usually provided for steel mills that meet ultra-low emission standards.”

These factors combined could mean bad news for the Australian economy given the iron ore boom has given it a considerable boost after the knock it’s taken from the pandemic and lockdowns.

Iron ore prices have fallen so rapidly that prices are tracking below implied federal budget levels, Mr Dhar revealed.

“The budget assumes that iron ore prices fall to $US55 ($A76) tonne by the end of quarter one of 2022. While higher prices in July 2021 still mean that the year-to-date average iron ore price for 2021-22 is still above the budget estimate, it’s only a matter of days before that reality reverses,” he warned.

“For every $US10 ($A14) a tonne decrease in the iron ore price relative to the budget forecast this financial year, Australia’s nominal GDP and federal government tax receipts are expected to fall $A6.5 billion and $A1.3 billion respectively.

“While we still think it’s unlikely for iron ore prices to fall as steeply as the budget forecasts in coming quarters, it’s certainly clear that iron ore prices may not be as positive for the Australian economy as hoped.”