The prospects for Australia's biggest commodities export continue to worsen in the eyes of forecasters, with the federal government's forecaster wiping $66 billion from expected iron ore export revenue out to 2016-17 and leading global commodities trader Goldman Sachs giving a more dire outlook on prospects for the mineral.
The declining outlook, which is based on twin negatives of growing supply and falling demand, plus downgrades from Goldman, led the sharemarket to a five-month low, while in London Rio Tinto shares had their sharpest fall in 18 months.
The Bureau of Resources and Energy Economics, in its annual update of five-year forecasts, wiped $US17bn ($16.3bn) from the nation's forecast 2016-17 iron ore revenue, slashing it to $69.69bn from a forecast of $88.26bn made 12 months ago.
Its forecast for total iron ore revenue from this financial year to 2016-17 was revised down from $392bn to $326bn despite increased production forecasts.
But this time it was not Chinese demand that was changing the scene, it was the resilience of China's high-cost iron ore production, which had been expected to be priced out as Australia, the world's biggest iron ore producer, continued to push out more supply.
"Continued investment in large-scale (Chinese) mines is likely to offset the loss of marginal mines and moderate future demand for imports," Goldman said.
"Unlike the small, privately owned mines (which are sensitive to moves in spot prices), vertically integrated iron ore production from large-scale mines (gives) a transportation cost advantage and provides security of supply."
Big one-off costs of idling large mines and a loss of revenue for local mines also supports production, the bank said.
This, combined with the well-canvassed effects of slowing steel demand and increased scrap supply offsetting iron ore demand has led the bank to "shift to a more neutral outlook".
While it dropped its 2013 price forecast by only $US5 a tonne to $US139 a tonne, it expects a structural oversupply to occur in 2014 -- one year earlier than previously expected -- and prices to slip to $US80 in 2015.
According to Goldman, the effect of this on Australia's big three miners is to wipe 48 per cent from Fortescue Metals Group's 2014-15 full-year earnings forecast, 14 per cent from BHP's and 23 per cent from Rio's 2015, when iron ore prices are forecast to fall to $US80.
The bank downgraded BHP's London (but not Australian) stock and Rio's Australian stock from buy to neutral. The miners led the stockmarket to a 0.4 per cent decline yesterday, with BHP falling 2.7 per cent to a four-month low of $33.62, Rio falling 2 per cent to a four-month low of $57.48 and Fortescue falling 2.3 per cent to a four-month low of $3.80.
In London, Rio's stock fell 5.2 per cent on Tuesday night.
Fortescue chief Nev Power, speaking in Hong Kong, maintained iron ore was not likely to drop below $US100 a tonne.
"We need another 300 or 400 million tonnes of new supply or contraction in demand," Mr Power said.
"I don't see that happening anytime soon, I don't see where this new supply is going to come from to force the iron ore price to those levels."
BREE caught up with other forecasters in slicing its 2017 iron ore price forecast by $US19 a tonne to $US97 a tonne.
For Goldman's commodities team, the factor that led them to downgrade the medium-term outlook to neutral was China.
