only considering that part of steel production that is exported back to Australia
Because China (where most of the Australian ore goes, and from where China imports most (2/3) of its ore for that matter) makes so much more steel, compared to everyone else basically.
Yeah, China ate the lunch of some of the domestic Australian steel industry too, but that's rather insignificant in the balance of things, with respect to ore exports.
Australian ore production/export growth basically mirrors that Chinese steel production growth:
Frankly China themselves would probably stop importing Australian iron ore if they could [for geopolitical reasons], but unlike with coal (which they've shifted their imports to Indonesia and Russia), they don't have an easy substitute for Australia when it comes to iron ore, given the volumes they use.
As a bit of a history lesson, Australia did impose an ore embargo on Japan in 1938. Somewhat surprisingly perhaps, the Australian export restrictions for iron ore were not lifted until 1960, when significant additional deposits had been discovered, and when Australia also experienced a significant trade deficit.
The Chinese government have no qualms when it comes to controlling the export of mineral resources. The story of the rare earths tells a lot. The Australian government has a rather different attitude. Why?
Iron ore exports are worth
$136 billion to Australia’s economy a year
Australia isn't going to embargo China [on that kind of sum] on the hope that China will later buy finished products... from Australia of all places.
Unlike Japan, which imports 100% of their iron ore, China has substantial domestic deposits, and some domestic extraction too. It's just that these Chinese deposit are of much lower grade than the Australian ones (30% vs 65% purity, on average, according to a 2010 USGS document), which makes the extraction of many Chinese deposits uneconomical, given import alternatives.
Another issue is that most of the Australian industry is/was located in the eastern part of the country, but the vast deposits discovered from the 1950s onwards were in the western part. As one book puts it "access to the world market was a precondition for the expansion of reserves" because these were gradually surveyed by and large only after Western Australia lobbied for exports. There was also a bit of secessionist political agitation related to that in the 1970s.
As for the comparison with rare earths, the entire world trade in (unprocessed) rare earths is only worth some $2.7 billion. And the value added by those is probably much higher than for iron/steel. Also, China lost some WTO disputes over rare-earth export controls.
You also have consider this from an employment perspective. China employed about 5 million in the steel industry in 2016 (according to the WSJ.) If hypothetically Australia would be producing all the steel that China needs, that would be pretty much everyone who's not working in education, retail, healthcare, construction, and public administration in Australia. (In comparison, mining only employees about 215,000 in Australia. The steel industry itself seems to employ about 140,000 in actuality, in Australia.)
This is to say nothing what kind of shocks such an workforce would experience on demand variations from China. During the 2016 overcapacity crisis in China, various figures for layoffs were advanced ranging somewhere between hundreds of thousands and over a million. Granted China probably had some reasons to inflate those, to placate the complaints from other countries, in terms of efforts it was making to deal with the problem.
(Assuming counting methodology is comparable, that 140K [actual] steel workers in Australia is still a lot. It's about the same number as in Turkey, or in half of the EU, both of which have substantially larger populations than Australia [25 million, Turkey - 85 mil., 1/2 EU: 220 million].)