Chinese demand for iron ore and the price of Australia’s biggest export — by some stretch — has been instrumental to our economy’s success these past four years as most of the rest of the western world has struggled. Last year Australia exported A$64.1 billion worth of the commodity, up 13% from the year before and from $5.3 billion in 2001.

After plunging to $60 per tonne during the global financial crisis it has again been happy days for mining companies — earlier this year iron ore hit a record price of $191.50 per tonne. The big three iron ore producers — Rio Tinto (London-based), BHP Billiton and Fortescue Metals Group — were making hay, shipping record volumes at record prices. All three companies had pushed the button on major expansions to their mines in Western Australia’s Pilbara region. The market loved them, as China appeared to defy the trend of recession around the globe.

But there is plenty of truth in the old market adage that what goes up will at some point likely come down: towards the middle of 2012 Chinese growth slowed, slipping from 10.4% in 2011 to 7.4% in the third quarter of 2012. With that sharper than expected fall came a concomitant slump in the price of most resources (some including copper were more resilient) but iron ore was hit particularly hard as China’s steel-intensive infrastructure projects slowed, and the government put the brakes on China’s surging property sector.

By the middle of this year, the iron ore price had collapsed to as low as $86.70 in late July — less than half its peak levels only six month earlier, and even a level lower than three years ago.

In this world of electronic trading and commodities derivatives, China — and Asia’s other big iron ore customers Japan and South Korea — all had an archaic system of annual price negotiations. This blew up in 2009 when the China Iron and Steel Association took over negotiations from Shanghai steel mill Baosteel. CISA failed to strike a deal, four Rio Tinto executives including Australian Stern Hu went to jail and BHP succeeded in instituting a new system based on spot prices.

July’s price slump (along with other commodities) was short-lived but it was enough to see the mining sector significantly scale back its capital projects and expansion plans. It sent FMG — the highest-cost large producer by some margin — screaming off to its bankers for another loan, this time for $5 billion which has brought its total debt to over $11 billion, a level analysts see as unsustainable if the price falls much below $100 again next year.

Right now the portents look good. But the devil, as ever, is in the detail. Last week iron ore hit $135.50, a six-month high. That’s the spot price, and large shipments from mills will be sold in at lower prices. Informed sources say that Fortescue is discounting more heavily than its rivals.

“Two weekends ago at a major industry conference in China there was optimism that steel production — which was looking as though it may have been reasonably flat compared with 2012 — would rise by between 3-4% next year.”

Two weekends ago at a major industry conference in China there was optimism that steel production — which was looking as though it may have been reasonably flat compared with 2012 — would rise by between 3-4% next year. This has given some cheer to the industry which has seen a raft of blast furnace closures to cope with high steel inventories as well as falling steel prices.

At the beginning of this year senior iron ore executives were delivering assurances to  shareholders that there was, in effect, a floor price of about $120 for iron ore because at that rate iron ore mining in China became uneconomic, causing mines to close. Last weekend the ruling Communist Party concluded its annual Economic Work Conference which sets economic targets and theme for the year ahead. This year its goals were vaguer than usual due to the ongoing change in the leadership. Senior party posts have been settled and now the less important government jobs are being quietly decided for sign-off at March’s National People’s Congress.

“We expect there will be a quiet loosening of property restrictions: limits on prices will be relaxed and mortgage discounts offered,” Tim Murray, an Australian analyst at Beijing-based J Capital Research, told Crikey. “[CCP leader] Xi Jinping’s visit to Shenzhen gives the clear signal that he is channelling Deng Xiaoping. On the simplest level, it signals monetary loosening, stimulus, a policy of anything goes as long as people spend money. This will see real estate development surge and along with it the price of iron ore.”

There is evidence of property prices crashing at the top end in some big cities, but sales have picked up in recent months in major centres such as Beijing and Shanghai.

Murray cautions against too much optimism on price due to a new plan by Beijing to improve local production. He says domestic iron ore miners and steel scrap companies are expected to get VAT relief by as much as 50% to make them more competitive as they face potential lower iron ore prices as more production comes online in Australia. This would see the domestic cost curve for iron ore go down by around $10 so marginal cost producers will now have costs of $100 instead of $110.

Chinese iron ore production is expected to expand again in 2013 by around 15 million tonnes and the seaborne iron ore supply is expected to increase by 90 Mt. With China’s steel production in 2012 about 720 Mt, that will mean 30 Mt of new production or around 45 Mt of new iron ore demand. So the iron ore market, even with the likely new stimulus, will be in oversupply in the second half of 2013.

Murray’s prediction — and he successfully picked this year’s price slump — would see iron finish 2013 in the range of $100-$120 per tonne and dip below $100 if there is any significant de-stocking at the end of the peak season in July — August.

That’s why Fortescue is busy selling assets and shares in a number of its projects — so it doesn’t get caught with its pants down again. But it doesn’t end there. More supply is coming online in the next few years, China’s growth is planned to be 7.5% in coming years rather than 10% and predictions are the price could fall to an average of about $75 per tonne in 2015.

The salad days are over.