“The stockpiles in China have come down, they haven’t increased, over all its oversupply talk. So why has the iron ore price collapsed? That’s the question which I think the nation should be allowed to ask,” he told the ABC last week.

With the Chinese steel mills clearing all fresh iron ore supply coming to the market, Forrest’s allegation is that the fall in the price reflects instead constant pessimistic commentary from the two major Australian based miners about oversupply which he believes is calculated to drive China’s futures prices low and force new entrants to such as his Fortescue Metals Group (FMG) out of the market.

It is certainly the case that China’s port stocks peaked in the first half of last year at around 107 million tonnes and have drifted down to about 92 million tonnes at the same time as prices have more than halved.

Some have noted that stocks started climbing rapidly in October 2013 just as the Dalian futures exchange started trading iron ore contracts and that this coincided with prices starting to slide. The implication is that speculators or Chinese manipulation is behind the price slide.

However, the physical trade in iron ore is too huge to be driven by anything other than fundamentals. It certainly cannot be “talked down”.

It is the potential supplies hanging over the market rather than the stocks at China’s ports that are shaping prices. All that anyone in the market can see is an abundance out to horizon and beyond.

Forrest’s Fortescue has been the biggest single contributor, with its production soaring from 33 million tonnes in 2010 to 158 million tonnes last year. This 119 million tonne increase in Fortescue’s output compares with the 91 million additional tonnes generated by BHP Billiton over that period and the 56 million tonnes fresh output from Rio Tinto.

Fortescue has mostly taken its share of Australia’s exports from Rio Tinto. Fortescue’s share has risen from 9 per cent to 21 per cent since 2010, while Rio’s share has fallen back from 52 per cent to 38 per cent. BHP-Billiton has maintained its share of just under a third.

The rise of Fortescue has been an amazing entrepreneurial effort and has helped to lift Australia’s share of Chinese imports from 43 per cent to 59 per cent over the last five years.

There is further growth to come. Australia’s iron ore output will rise by 100 million tonnes over this year and possibly by a further 60 million tonnes in 2016 as Gina Rinehart’s 55 million tonne Roy Hill mine is brought up to capacity.

In Brazil, Vale, which produces about 330 million tonnes (compared to Australia’s 735 million tonnes), is aiming to lift production to 450 million tonnes within the next three years, to regain some of the market share it has lost to Australia over the last five years.

Beyond Brazil, there are untold reserves in Africa if it can get its political act together sufficiently to support multi-billion dollar investments. Rio Tinto has its foot on the best of these, with its Simandou project in Guinea, which is planned to add 100 million tonnes.

That China also wants to reduce its dependence on Australia was shown by its financing deal last week to support the construction of Vale’s 90 million tonne S11D mine, which will be the most advanced in the world.

Where Australian miners have been installing driverless trucks, this will be a truckless mine using conveyor belts and slurry pipelines. Australian observers expect there will be teething troubles with such an advanced project, but the technology underlines the relentless drive to lower production costs.

BHP-Billiton and Rio Tinto have been very successful in lowering their production costs, with BHP-Billiton claiming a near 30 per cent cut to an average $US20 a tonne (helped by the fall in the Australian dollar).

The Australian Competition and Consumer Commission’s chairman Rod Sims firmly rebutted Forrest’s claim that the two big miners were engaging in predatory pricing, noting they were still profitable at current prices. Predatory pricing — lowering the price with the intent of driving a competitor out of business — involves selling at a loss.

Most of the expansion in the iron ore industry both in Australia and Brazil was premised on China’s steel industry continuing its growth at a somewhat slower pace than the breakneck 17.5 per cent which it averaged through the 2000s, to rise from the 820 million tonnes achieved in 2013 reaching 1 billion tonnes by 2020.

However China’s steel production has now been at a standstill since the end of 2012, with monthly production hovering between 66 and 68 million tonnes. In the first four months of this year, it is slightly down on last year. Domestic consumption has been falling more sharply and production levels are only being maintained by exports which reached about 90 million tonnes last year.

The recent Westpac/Department of Industry review of China’s resource sector highlighted the problems confronting steel demand. There is speculation that China may have reached “peak housing”, with the enthusiasm of developers having brought forward activity by many years, “robbing the future for a supercharged yesterday”.

Overcapacity also plagues heavy industry including basic materials, extractive and machinery sectors. This is depressing capital investment. The imperative in the Chinese steel industry is to close inefficient mills. The industry may see no further growth for some years.

With demand for iron ore no longer rising, the only way new supply can be absorbed is by displacing higher cost production. The 200 million tonne a year growth in Australia’s iron ore exports since 2012 has entirely been at the expense of higher cost Chinese production and second tier producers such as Peru, Chile, Iran and the Ukraine.

The objective is to be in the lower half, and ideally the lowest quartile of production costs. Achieving this means maximising output through the existing invested capital. If Fortescue cannot get its costs down far enough, its production will be displaced by those who can. The more successful miners are at cutting costs and the more supply that comes to the market, the lower the prices will fall.

The prospect of further production growth meeting constrained demand means that prices will fall further. They would fall a lot further in the event of a Chinese downturn.

Both Treasury and the Reserve Bank have assumed that Australia’s terms of trade (export prices compared with import prices) will remain permanently higher than their long-term historic average because they believe China’s demand (and India’s future demand) cannot all be met from low-cost supplies of iron ore (and other commodities). As the mining companies succeed in lifting output and lowering costs, that assumption is being challenged.

The terms of trade would fall by another 30 per cent were it to return to the long-term average, with profound implications for incomes across the Australian economy and for commonwealth and state budgets.