Prices doubled in 2016 and are now around $80 a metric ton, catching industry players by surprise as a surge in demand from Chinese steelmakers after state-mandated capacity cuts boosted buying.
"The rally reflects a combination of fundamental drivers and speculative trading. However, with the likely moderation of these factors over the outlook period, the iron ore price is still forecast to decline," said the Australian Department of Industry, Innovation and Science in its energy and resources quarterly report released on Monday.
Speculative activity is reflected by a sharp increase in iron ore futures traded on the Dalian Commodity Exchange on the back of the U.S. election outcome and announcement by Chinese authorities that steel capacity cuts have been exceeded.
The price rally also occurred despite a steady rise in China's port stocks through 2016, the department noted. Stocks reached 100 million tons in December to hit a two-year high.
Iron ore prices will likely average $51.60 a ton in 2017 and $46.70 a ton in 2017, predicted the department said.
Still, Australian iron ore exports will fall by 2 percent to 832.2 million tons in fiscal 2016-2017 from 851 million tons in the last forecast, though the latest forecast will still be a 5.9 percent on-year rise.
The outlook for some other commodities is better.
Coking coal is likely to continue its winning streak after becoming one of the best-performing commodities last year, rising by 59 percent on a contract basis this year to an average $182.20 a ton in 2017, said the department.
The value of the country's liquefied natural gas exports is also forecast to rise by 50 per cent a year to $37 billion in 2017–2018 due to higher global prices and rise in export volumes as large projects come online.