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.