The Australian iron ore industry has long expected to replace Chinese miners as the main suppliers of iron ore to Chinese steel mills, because the costs of production were typically lower in the Pilbara than in China. Orica chief executive Alberto Calderon has announced plans to write down the value of its assets by as much as $1.65 billion and has hosed down the market's earnings expectations by 10 per cent. Credit:Carla Gottgens But the dramatic slide in the iron ore price has challenged that notion, which was supposed to keep iron ore prices around $US110 per tonne in the long term. "The subsidies, if implemented, will sustain domestic production, increase the global supply of iron ore and result in prices slumping further," said Shenhua Futures analyst Wu Zhili on Wednesday. Iron ore miners in both countries have worked hard to lower their costs of production over the past year, but huge amounts of extra supply have continued to erode margins, and recent support measures by governments in both nations suggests the iron ore fight has progressed to a higher level.

Aside from rescinding the minerals resource rent tax, the carbon tax and Western Australia offering royalty relief, the Reserve Bank of Australia has also been accused by foreign miners of trying to save Australian miners by cutting interest rates in a bid to devalue the local currency. Despite those measures, Australian microcaps like Western Desert Resources have gone into receivership, while bigger players like Atlas Iron have ceased trading on the ASX while they try to work out whether they have a viable future at current iron ore prices. BHP and Rio Tinto are believed to be the only Australian miners making a profit at the current iron ore price. The Chinese tax cut will further stoke speculation that Australian miners, rather than Chinese, will be the victims of the iron ore price slump. Former BHP Billiton executive, and now Orica boss Alberto Calderon speculated as much during a speech in Melbourne late last year.

"The conventional wisdom was that the production tonnes that would be displaced through mines closing would be in China; this is probably not true," he said at the time. "China's iron ore production will remain around 400 million tonnes. Maybe it will drop to about 360 million tonnes, but it should orbit at around those levels during the next few years. "Yes there will be closures but new and more efficient mines are being built. China will repeat what it has done already in aluminium and thermal coal: create an oversupply of iron ore that will benefit them as a consumer country." Mr Calderon said China had saved itself about $US250 billion over recent years by flooding the aluminium market with supply and duly dragging down prices for the lightweight metal. That process forced many marginal aluminium smelters around the world, including in Australia, to be closed, and Mr Calderon said Australia's iron ore sector could endure a similar experience.

"The bulk of the reduction in iron ore supply will not come from China. A significant part of the excess tonnes may come from Australia. What we can guess with some certainty is that prices will revert to marginal cost, even under-shooting into the low $70s (per tonne of iron ore) for some years," he said. "Some iron ore producers, or many, will experience what their colleagues in aluminium and nickel have lived through over the past few years." with wires