Chinese steel production has peaked and will fall by more than 25 per cent over the next decade and a half, according to prominent economist Ross Garnaut, a drop that would undermine Australia's entire iron ore industry, cost billions in tax revenue and reduce the living standards of most Australians.

As iron fell to a decade low of $US47 a tonne over the Easter weekend, former BHP Billiton chief executive Brian Gilbertson criticised the world's biggest mining groups for flooding the market with iron ore, a strategy that he said would cost its shareholders over the long term and cost the country tens of billions of dollars of lost value for no benefit.

"When you see a price collapse of this magnitude, it's clear there is a major imbalance between supply and demand in the immediate future," Mr Gilbertson toldThe Australian Financial Review.

"The majors can't do much about demand, so the proper response should be to consider cutting back on supply.

"Instead, they seem to have a last-man standing approach where they remain committed to expanding and driving others out of the market. But the relevant question for shareholders should be whether it is in their interests to be left with such a bruised and battered boxer."

The price of the steel-making commodity is down 63 per cent since the start of last year, threatening the profitability of Fortescue Metals Group, Australia's third biggest iron ore miner, and undermining the federal budget. BHP and Rio Tinto, the biggest producers, have refused to back away from production increases that have contributed to the lower price.

Professor Garnaut, an economist who correctly predicted China's declining appetite for coal more than three years ago when others were forecasting continued strong demand, said he agreed with private Chinese estimates that steel production will fall to around 600 million tonnes by 2030, when BHP and Rio Tinto estimate it will be 1 billion tonnes.

"My old friends say that Chinese production should fall from a bit above 800 million tonnes today to about 600 million tonnes in 2030."

Professor Garnaut's view puts him at odds with Rio Tinto, BHP and the official government forecaster, the Department of Industry, which predicted a production rebound to about 930 million tonnes in five years.

But it places him at the centre of an emerging consensus in China, which believes the country's steel production has peaked.

After his most recent trip to China, where he served as Australia's ambassador in the mid-1980s, Professor Garnaut decided to outline his concerns for Australian iron ore exports. If he is correct, China's steel production peaked last year at 823 million tonnes and will fall by 27 per cent to 600 million tonnes by 2030.

Deloitte Access Economics partner, Chris Richardson said he backed Professor Garnaut, who remained well-connected in China, and said the implications for Australia were significant given its dependency on China.

"We have wrong-footed the Australian economy: we bet the house," he said.

Mr Richardson said for every dollar the iron ore price fell below forecasts, national income fell by abut $800 million and tax revenues declined by between $250 million and $300 million annually. The federal government's plans to return the budget to surplus within a decade look increasingly bleak.

Last year, between the May budget and the December update, the forecast average iron ore price was downgraded to $US60, resulting in a revenue write-down of more than $9 billion in two years. Now, it is to be downgraded again in next month's budget.

Rio Tinto and BHP have poured billions into new production capacity based on their forecast, even as China's economy slows and is driven more by consumer spending rather than housing and infrastructure investment.

Professor Garnaut said the iron ore price would continue falling until one of the big four miners – Rio, BHP, Vale of Brazil or Fortescue – cut production.

CHINA CUTS NOT ENOUGH

Cuts in China's domestic iron ore production will not be sufficient, he said.

"The price trend is down until enough of the old or new supply capacity has been destroyed to balance the decline in demand," he said.

This is a different narrative to that sketched out by the big miners. They have consistently argued the price is being driven lower by greater supply, not a significant weakening in demand across China.

BHP and Rio, as the most efficient producers, believe they will force higher cost miners to shut down, eventually bringing the market back into balance and pushing prices higher.

Rio chief executive Sam Walsh said in February, about 80 million tonnes of high cost iron ore would almost certainly be cut this year, and an additional 85 million tonnes was at risk.

Mr Walsh estimated about 125 million tonnes dropped out of the global market last year, with about 70 per cent of this coming from China's high cost producers.

Professor Garnaut acknowledges this "tsunami of new supply" from the majors has contributed to the price fall, but also points to falling demand.

He cites the key steel making province of Hebei as an example.

"Hebei, the province surrounding Beijing, was producing about 280 million tonnes of steel per annum at its peak. That will be reduced to 200 million tonnes by 2020 – and most of the fall by 2017," he said.

The rapid decline in the iron ore price this year has caught most industry players and observers off guard. It follows a horror 2014, which saw the price shed half its value to about $US68 a tonne.

Iron ore has since lost another 30 per cent of its value to be trading at $US48 a tonne on Monday.

At current prices, Fortescue is believed to be losing money, while Vale's margins are thin.

BHP and Rio – the lowest-cost exporters of iron ore in the world – are still marking solid profits and the falling iron ore price is unlikely to dent their controversial expansion strategies.

For that to happen iron ore would need to fall to around $US30 a tonne.

Investors in BHP and Rio have told the Financial Review they will continue supporting the expansion strategies for as long as it is profitable.

But the rapid price fall is threatening Australia's other iron ore miners – including Fortescue and Pilbara juniors like Atlas Iron, Mount Gibson Iron and BC Iron.

They will need to review production if prices stay at current levels for a sustained period.