Iron ore prices may be up for another dive as Chinese steel mills take a breather after the summer production peak, analysts say.
The benchmark iron ore price plunged to a fresh five-year low to $US84.30 a tonne on Thursday night, and is down 37 per cent since January 2014.
But the worst is yet to come, according to UBS analysts, who forecast a further fall in the iron ore spot price in September and October.
Historically, crude steel production rates in China have declined around September and November as the steel mills take a breather after the summer peak in steel deployment, according to the analysts.
"Lower production reduces steel mills ore requirements and may prompt a buyers' strike," UBS analysts said in a note.
The commodity price is likely to pick up again in November and December as China begins restocking in preparation for the northern winter, UBS said.
UBS forecasts the iron ore price to recover to the $US100 mark by December 2014.
UBS kept its price forecast for 2015 and 2016 at $US103, noting it is wary of "reading too much into a weak spot signal at the trade's seasonally weakest time".
Goldman Sachs analysts were more bearish for the bulk commodity, predicting iron ore to sell at $US80 a tonne in 2015.
The analysts said iron ore miners were facing a bumpy road in the short term as the negative impact of falling property prices on new housing kicks in in the 2014 second half and 2015.
The Chinese price for cement, a leading indicator of construction activity, has declined by 45 per cent in the year to date.
But the iron ore price was unlikely to dive too much more as the iron ore inventories were already low.
In 2012 and again in 2013, iron ore buyers ground the price down by aggressively destocking their inventories.
On Goldman Sachs figures, in 2012 the average inventory at 50 small and medium mills was reduced down from 450,000 tonnes in July to 275,000 tonnes in September and in 2013, from 550,000 tonnes in February to 300,000 in June.
But this year the inventory level was already low at 350,000 tonnes, which gave buyers little room to play with.
"The short term demand outlook is challenging, but we believe iron ore inventories held by mills are not high enough to support another major destocking cycle," Goldman Sachs analysts said.
"The shift in bargaining power from miners to steel mills is complete."
