In a sobering interview with The Australian Chris Richardson, director of Deloitte Access Economics, has warned of the repercussions of a sustained drop in the price of iron ore.

His comments come as the downward spiral of iron ore prices reached a dangerous level. The Chinese port of Tianjin announced it was prepared to pay $US49 a tonne (down from $US 51) for immediate delivery. Another large buyer, Qingdao, offered $US49.53.

$US50 a tonne for iron ore has been a safety threshold. The Australian miner Fortesque Metals Group (the world’s fourth-largest producer) said that at these prices the company will be losing money.

These prices, the lowest in a decade, have not been factored into the Federal Budget. Should they remain at these levels they could tear a 3 billion dollar hole in Australia’s economic forecast for 2015/16.

“What we’re now seeing,” said Chris Richardson to the Australian, “is that commodity prices around  the world are going back to normal. That is a big problem for Australia. It’s an old mistake to assume that a boom is permanent. In this particular case it was a very large boom and both sides of politics spent a lot.”

Rio Tinto and BHP Billiton (two of the world’s largest miners) have recently flooded the market with iron ore. This wave of supply is being blamed for the abrupt drop in prices. Added to this steel production has fallen within China (one of the world’s largest exporters).

Commodity forecasters believe the price plunge will continue. Deutsche Bank estimated the cycle will bottom out at $US40 a tonne.

Such predictions only put further pressure on the Reserve Bank of Australia to again cut interest rates when they meet next week.

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