Why iron ore's meltdown is far from over

Iron ore dump truck going down dirt road
Sunny Shende | Hindustan Times | Getty Images

Iron ore prices have dived an eye-watering 44 percent this year and there's no respite ahead for the metal, according to Citi, which forecasts double-digit declines in 2015.

The bank on Tuesday slashed its price forecasts for the metal to average $74 dollars per ton in the first quarter of next year, before moving down to $60 in the third quarter. It previously forecast $82 and $78, respectively.

"We expect renewed supply growth to once again drive the market lower in 2015, combined with further demand weakness," Ivan Szpakowski, analyst at Citi wrote in a report, noting that prices could briefly dip into the $50 range in the third quarter.

The price of spot iron ore fell $75.50 this week, its lowest level since 2009, according to Reuters.

Price declines in the first half of this year were driven by rapid growth in export supply, which has slowed in the second half of the year. In recent months, deteriorating Chinese steel demand and deleveraging by traders and Chinese steel mills has dragged the metal. Iron ore is an important raw material for steel production.

However, iron ore supply growth will return in the first half of next year, Citi said, as industry heavyweights Rio Tinto, BHP Billiton and Vale rev up expansions and Anglo American's Minas-Rio iron ore project in Brazil ramps up.

Read MoreRio Tinto lifts iron ore output to record as ore prices see-saw

Meanwhile, demand out of China – the world's biggest buyer of iron ore – will remain under pressure due subdued steel demand. Demand for steel is being compressed due to tighter credit conditions and an uncertain export outlook.

"Chinese manufacturing exports have improved in recent months, helping to boost steel demand for machinery, metal products, etc. However, with European growth having slowed such positive momentum is unlikely to continue," Szpakowski said.

'The party is over'

ANZ also substantially downgraded its 2015 price forecast for iron ore this week. However, it was not quite as bearish as Citi.

The bank, in a report published on Monday, said the metal will not breach $100 a ton again, forecasting prices to average $78 next year, 22 percent lower than its previous estimate.

"Recent trip to China highlights that demand conditions are more challenging than we thought," ANZ said.

Read MoreBig miners struggle to tame China with iron ore glut

"That said, we don't expect prices to fall below $70/ton – a level that would shut as much as 20 percent or 300 million tonnes of global iron ore supply, positioning the market into substantial deficit," it said.

But the bank notes that super high profits enjoyed by the iron ore sector over the past three to four years appear to be over.

"Big low-cost producers now seem keener on bedding-down dominant market share in an increasingly challenging environment," the bank said.

This explains the heavy declines in shares of Australia-listed mid-cap iron ore producers, which were up to 10 percent lower on Tuesday. Mt Gibson and Atlas Iron fell around 9.5 percent on Tuesday, while BC Iron declined 6 percent.

Read MoreIron ore glut: Areshutdowns the only way out?

"What's set it off? Finally, the more bullish analysts are cracking and downgrading their outlooks," said Evan Lucas, strategist at IG.

"We're in a production war; it's all about economies of scale and who can get the lowest costs possible. Mid-cap miners like BC Iron or Atlas Iron are barely keeping their heads above water. Bigger producers like Rio and BHP have a lot more room to move," he said.