HispanicBusiness

Sydney (dpa) - You don't have to be an economist to know that when demand falls, so do prices.

China's steel mills are cutting production in response to falling demand and that is driving down the price they pay for iron ore and coal, Australia's top two exports.

Iron ore is fetching about half of what it did in January 2011. A shipment of coal has lost about one-third of its value in the last three months.

If Europe rebounds and China's steel mills start humming again, commodity prices will pick up and mining companies will be glad they went ahead with investments to raise production.

A sticky recession that slows demand further will make some wish they had held back.

"Investors are much more pessimistic as they see commodity prices falling," David Hand, head of Sydney-based Newport Consulting.

"You've got this pile up of negative sentiment and risk, which says we'll just hold off for a year or so on this major investment."

BHP Billiton Ltd, the world's biggest miner, this month shelved a 30-billion-US-dollar expansion of its Olympic Dam mine.

Also in August, Indian company Deepak Fertilisers Ltd said plans for an ammonium nitrate plant near Olympic Dam in southern Australia were back in the drawer.

Deepak also makes explosives used in mines.

Mining accounts for 7 per cent of Australia's economic output, almost double its share in 2000. It is the driver of other sectors and cutbacks will slow growth across the economy.

One of the few advanced countries to avoid recession in the global financial crisis is expecting its economy to grow 3 per cent this year and next.

Stress in the mining sector could overturn those predictions.

Australians are adjusting to a bleaker picture after 21 years of growth.

Jim Tate, a senior officer with Australia's biggest bank, told a parliamentary inquiry that people were paying off debt at the fastest rate in 30 years.

"This isn't just in households, this is across business now for three years," the Westpac executive said.

"They read the papers, they see what's going on and they say 'look debt isn't going to be my friend if things go bad, so I'm going to get myself back into a situation where I've got a lot of equity back in the house.'"

Ebbing consumer confidence is making it tough for retailers and has caused government officials to try to stimulate private spending by talking up the nation's prospects.

"Australia has solid growth, low unemployment, contained inflation, low interest rates, healthy consumption and a massive investment pipeline," Treasurer Wayne Swan said. "These economic fundamentals are the envy of the developed world."

He urged people to see the mining boom "as a series of booms - a boom in prices, a boom in investment and a boom in exports."

While prices have come off their highs, there are mining projects in the pipeline to ensure no let-up in the volume of shipments.

The worries he sees are on the demand side, with top-customer China slowing and the international market for commodities favouring buyers.

Australia's proximity to China gives it an edge over South American suppliers of minerals, but high commodity prices have served to mask the nation's high production costs.

Productivity has fallen as wages and taxes have risen, further eroding local advantages.

"A significant factor is the intransigence of the union representatives regarding any flexibility on their part is now making mining investors much more pessimistic as they see commodity prices falling," consultant Hand said.