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--Clyde Russell is a Reuters columnist. The views expressed are his own.--
By Clyde Russell
SINGAPORE, May 15 (Reuters) - Any inquiry into the collapse of iron ore prices by the Australian Senate is likely to provide a great opportunity for political point-scoring for a domestic audience, but won't address the main issue.
It's still not clear whether independent Senator Nick Xenophon has enough support from the major parties, the ruling Liberals and the opposition Labor, to launch an inquiry, but he did receive backing for the idea from Prime Minister Tony Abbott.
If any inquiry did go ahead, it would provide a platform for Andrew Forrest, the chief executive of No.4 iron ore producer Fortescue Metals Group, to continue his campaign against the expansions of No.2 and No.3 miners, Rio Tinto and BHP Billiton.
Forrest would most likely relish the chance to continue to portray his company as the tough "Aussie battler" being bludgeoned by heartless multinationals that have failed to act in the interests of Australia and its people.
While this sort of attack may play well in the domestic media arena, it's also likely that any Senate inquiry would find that BHP Billiton and Rio Tinto haven't done anything illegal in ramping up iron ore output to levels beyond demand growth.
In fact, it's likely that the two mining giants would be able to win the argument that the massive expansions at their Western Australia state mines were logical and made business sense in the light of their low-cost advantage.
But whatever spectacle emerges, assuming an inquiry does go ahead, it won't address the main issue of who is right on the future of China's iron ore and steel sectors.
On the one hand are the three major miners, Brazil's Vale , Rio Tinto and BHP Billiton, who are sticking to their view that Chinese steel demand and output still have some way to rise.
On the other hand are the representatives of the Chinese and global steel industry, who believe that China has already reached "peak steel", and demand will anchor around current levels.
BHP's vice president of iron ore marketing, Alan Chirgwin, told the Singapore Exchange's Iron Ore Forum on Wednesday that China's crude steel production would peak at 1 to 1.1 billion tonnes in the mid-2020s and plateau through to 2030.
At the same forum, Zhang Dianbo, an assistant president at major Chinese steel producer Baosteel Group, said that steel demand was unlikely to grow from current levels, but would plateau and was equally unlikely to decline.
A similar view has been expressed by the China Iron & Steel Association and the World Steel Association, with the latter expecting a 0.5-percent decline in Chinese demand this year to 707.2 million tonnes.
Chinese crude steel production was 822.7 million tonnes in 2014, exceeding domestic demand and leading to a surge in exports, a trend that has continued in 2015.
Steel output in the first four months of 2015 was down 1.3 percent to 270 million tonnes from the same period last year, according to official data.
What was left unresolved at the SGX forum was how to reconcile the view of the big miners for Chinese steel output to reach as much as 1.1 billion tonnes per annum, and the assertion that the peak was last year.
The difference between the two forecasts is more than 250 million tonnes, an amount large enough to make an enormous difference to the outlook for the iron ore industry.
If BHP, Rio and Vale are right, then their expansion plans will be justified and the 400 million tonnes of capacity they have added, or are in the process of completing, since 2011 will be absorbed by China.
If they are wrong, then the market will remain in massive oversupply for many years, and iron ore prices will struggle to rally.
Currently, it seems the peak steel argument is winning the day, but BHP's Chirgwin points out, China will still need more steel for sustainable economic growth, even if the short-term outlook is more volatile.
For BHP and the other miners to be proven right, China would have to accelerate the rate of urbanisation, as keeping it steady would imply limited scope for increased steel demand.
Given the headwinds facing the private residential property sector and heavy manufacturing, it seems unlikely that the rate of urbanisation and the associated boost to housing and infrastructure spending will be forthcoming.
This is being reflected in the futures pricing for iron ore, which hasn't followed the recent rally in the Asian spot price .IO62-CNI=SI, which had gained 31 percent to Wednesday's close of $61.20 a tonne from the record low of $46.70 on April 6.
The SGX iron ore swaps curve <0#SGXIOS:> has responded to the increase in the spot price by moving into a steeper backwardation, with the 12-month contract at a discount of 16 percent to the front-month.
Three months ago the discount between the two contracts was 5.2 percent and a year ago it was 3.4 percent.
This shows the market doesn't have confidence in the current rally, and with even BHP acknowledging that more new supply will enter the market this year than the amount of high-cost output that will be idled, it's hard to build the case for sustained price gains.
Editing by Joseph Radford