With base metals taking a blow in prices in recent weeks, the Australian government may have to rethink policies and fiscal regulations that will keep the country's economy afloat and not be totally dependent on earnings coming from its mines and minerals sector.

Commodity prices have been weighed down by concerns about ongoing strength of demand in an environment of slowing global economic growth, with exchange-traded base metals, such as copper, seeing sharp volatility.

Though it took a while for prices of iron ore to react, ultimately they did give in to pressure. Reports out last week indicated spot iron ore has fallen by around 30 per cent in the past month.

Worries about China's economy slowing down, which in turn gave a dent to Chinese steel makers holding back from making purchases, coupled with an oversupply, contributed to iron-ore prices going down.

Australia, along with Brazil, supply around 75 per cent of the seaborne global iron-ore market, while China imports around 60 per cent of total global seaborne iron ore.

Exports of iron ore, together with coal, have helped boost Australia's trade and economy as well. Together the two commodities comprise 40 per cent of Australia's total merchandise exports.

Specifically, iron-ore exports account for around 14 per cent of Australia's total exports and 2.5 per cent of its nominal gross domestic product.

A dropoff therefore in iron-ore and coal exports could prove hazardous to Australia's trade and economic health.

Analysts forecast first-quarter benchmark iron-ore prices to fall 10 per cent from the fourth quarter.

"A drop in prices of this magnitude would translate into a 3 per cent fall in Australia's terms of trade in the first quarter of 2012 and a 6.5 per cent drop for the year," according to analysts quoted by MarketWatch.

However, analysts said the sell-off for iron ore may also only be temporary, and prices may bounce back as underlying demand in China continue to remain robust. Buyers may come back in two to three months to capitalize on the weaker prices.

Still, they said the continued drop in iron-ore prices should push the Australian federal government to review its monetary policy.

"Further falls through 2013 and beyond are likely as supply begins to come on line," analysts said.