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Iron ore could drop another $10

Iron ore prices continue to drop, defying expectations for a rebound and leaving investors with a key question: how much worse will things get before they improve?

"I'm certainly on guard for an overshoot to the downside and I wouldn't be surprised if the current momentum kept going and we see a fall down to $70 a tonne," Ric Spooner, chief market analyst at CMC Markets told CNBC.

Prices are down 41 percent year to date and touched $79.80/ton last week - their lowest level since September 2009. The price decline flies in the face of market expectations; last month, when iron ore was trading around $90, a number of analysts told CNBC that prices were set to rebound.

And in a further bad sign for the commodity, Australia's state commodity forecaster cut its iron ore price estimates for this year and 2015 on Wednesday.

The Bureau of Resources and Energy Economics cut its 2014 forecast to $94 from $105 a ton and its 2015 forecast from $97 to $94, as a result of surging production in Australia - the world's largest supplier - outpacing Chinese demand.

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Supply and demand

Supply/demand fundamentals have been blamed for iron ore's slump. High prices on a historical basis led to a surge in global production, while slowing growth in China - the world's largest iron ore consumer - prompted worries about declining demand.

"When you get a big shift in the supply and demand dynamics of any commodity, market prices can go a lot further than the consensus thinks it will," Spooner said.

"In the short term we would have thought iron ore was approaching its bottom, but while we are still seeing [economic] numbers coming out of China suggesting signs of slowing, there will always be pressure to the downside," said David Lennox, resources analyst at Fat Prophets.

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Conor O'Malley of independent research firm View from the Peak, told CNBC the recent sharp slump in prices showed China's steel and iron ore industry had pressed the panic button and was now in destock mode.

"Underlying steel demand is slowing but it is not collapsing. Yet, today, perception matters more. No one wants to buy - let alone hold - anything. So its not a pretty picture and the market just needs to find some level of consolidation before limping into golden week in early October," he said, referring to a seven day public holiday in China starting on October 1.

China posted a number of weak economic data points in recent months, including a sharp fall in its August industrial production growth. Hopes of further stimulus to support the economy were dashed on Sunday when Chinese Finance Minister Lou Jiwei said the government will not significantly change its economic policy based on a single economic indicator.

Olivier Lantzendörffer | Vetta | Getty Images

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Fat Prophets' Lennox believes a decline to $70-75 is plausible considering that the world's two largest miners - BHP Billiton and Rio Tinto - both enjoy relatively low marginal costs of production at around $50/ton and would be able to withstand further declines.

"From their point of view they could see the iron ore price go down to $70-75 then they might start to be concerned about their margins," he added.

Lower prices pressure smaller mines to close if the cost of production becomes less affordable. Larger mines are better to equipped to withstand lower prices because their cost of production is so much lower, putting them at a competitive advantage against smaller players.

Read MoreIron ore glut: Are shutdowns the only way out?

Better prospects long term

Iron ore's long-term prospects are better, Lennox said, reiterating his forecast for are bound to $100 in 2015 as China scales back domestic ore production.

A number of smaller mines in China - where most producers are based - have closed this year - a trend some analysts expect will help prices recover.

"If that continues, and China starts to import more high quality iron ore, rather than relying on its own lower quality domestic market - that will spur a recovery in prices," he added.

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CMC's Spooner expects prices to rebound as high as the low $90s this year on improvements in seasonal demand, but sees prices settling between $70-75 in the long term.

"It takes time for supply adjustments to be made in commodity markets, for mines to be closed and production withdrawn...so against a background of softening of demand in China, prices would need to drill down to the $70s to get that supply adjustment going," he said.

O'Malley also sees the iron ore market tightening as Chinese mines and some smaller foreign exporters are switched off.

"I'm still confident that we could be challenging $100 a ton come January on the continued tightening of the domestic Chinese supply and demand. The market just needs to calm down first and focus on fundamentals."