Iron-ore prices have fallen by around 35 per cent in the past year. This follows six years of strong increases.

What’s happening?

From 2005, demand for iron ore, notably from China, increased strongly.

Producers responded: in the next six years (2005-11), production outside China increased by around 480 million tonnes (or nearly 45 per cent)*.  

This was not enough to satisfy increased demand and the production shortfall was made up by China itself.

At the same time, from 2005, major expansion projects were initiated, notably in Australia, Brazil and West Africa.

If these all come to fruition, non-Chinese production will increase by at least 900 million tonnes in the next six years (2012-18).

But at recent high prices, demand is unlikely to match this increased supply. Markets appear to be anticipating this.

The situation is exacerbated by economic turmoil in Europe, sluggish growth in the United States and signs of some economic slow-down in China. 

But fundamentally, it represents the excesses of commodity-price cycles: increased demand leads to increased supply, which takes time to come about and, when it does, typically overshoots what is required.

This phenomenon is being seen with most minerals and with natural gas.

There will be ups and downs in prices, with some recovery possible from current levels.

But if the analysis here is correct, the price boom is over.

Demand for minerals may continue to be quite strong.

But much of the supply to satisfy this is already in place or planned. Some projects will not go ahead. And the room for new projects will narrow.

Some Australian mining companies will become more active overseas, where costs are lower.

For mining-service companies, project work will become more competitive, while existing mining operations in Australia and project work overseas may become more important.

None of this in itself means a slump. But it does mean that life will become tougher.

* Source: US Geological Survey.