Forget the tumbling iron ore price, Australia's miners could be in for an even harsher shock. In fact, if one of the industry's top officials is correct, the miners' worst fears could soon become a reality.
As reported by The Australian Financial Review, Li Xingchuang, President of the China Metallurgical Industry Planning Association, has forecast Chinese steel consumption to peak in 2017 at 740 million tonnes.
That's significantly earlier than what BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) have both been building towards. BHP is on track to produce 290 million tonnes per annum by 2017 and is of the belief that Chinese consumption would peak around 1.1 billion tonnes somewhere between 2020 and 2025. Rio Tinto, on the other hand, is on track to produce 330 million tonnes in 2015 and has forecast China's consumption to peak in 2030 at around 1 billion tonnes.
Indeed, the pair, together with Fortescue Metals Group Limited (ASX: FMG), have been investing heavily in the commodity and have largely been the reason behind the spot iron ore price plunging this year. While Chinese demand growth has been slowing, BHP Billiton and Rio Tinto have both been rapidly expanding their production rates, forcing some of the higher-cost miners out of the picture. The commodity has now dropped 48% since the beginning of 2014 to be changing hands for just US$69.98 a tonne.
If Mr Xingchuang's forecasts prove correct and demand does peak in 2017, the situation could prove catastrophic for both companies' long-term plans. Iron ore prices would crumble further, taking BHP's and Rio Tinto's margins and overall profits down with it. This is particularly the case for Rio Tinto, given that more than 90% of the miner's revenues are generated from the commodity.
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Although the best time to buy stocks is when they are out of favour with the market, there are strong signs that suggest things could get even worse than they are now for Australia's iron ore miners.
