A SURFEIT of steel products in China's factories is set to crimp demand for Australia's iron ore exports, and analysts say it will take months to fix the problem.
Australian iron ore stocks were smashed yesterday after the price of the metal fell $US4 a tonne overnight to near three-year lows of $US90.30. In the last month alone the global price of iron ore has lost 23 per cent.
Yesterday the local market lost 1 per cent, with big falls for iron ore majors BHP Billiton and Rio Tinto, which were off 2.4 per cent and 3.8 per cent respectively.
Analysts said Chinese steel production was increasing in the first six months of this year while construction was slowing down.
"This isn't a story that's going to disappear overnight. It is going to take months and months for Chinese inventories to clear," Westpac chief currency strategist Robert Rennie said.
Official steel prices are being cut and some Chinese steel plants are closing their doors. Zinc production has been cut back significantly and coal production is dropping.
In the three months to July, China's steel production was running at record levels. It produced 182 million tonnes of steel in that time. In the first six months of the year, it produced 687 million tonnes: a record.
Brokerage UBS' long-term outlook for iron ore is $US70 to $US80, with the fall being driven by extra supply from new projects, rather than weak demand from China.
"I don't think anyone expected iron ore prices to drop as quickly as they have and that's from the demand side as we're seeing a slowing in China and opportunistic de-stocking," said UBS Perth office head Tim Day. "On the supply side, once it slides below $US120 you start to see a lot of the marginal producers dropping out."
As demand for iron ore falls, it's bad news for Australia. Last year iron ore accounted for 20 per cent of Australia's exports.
Prominent hedge fund manager Jim Chanos is betting on iron ore producers struggling as Chinese demand slows, singling out Fortescue Metals, saying it's a "value trap" and short-selling the stock, betting that it will fall. Fortescue, which argues that iron ore prices will rise again, fell 1.6 per cent yesterday.