Iron ore price is set to fall as early as tonight

So much for the iron ore price rally – it was nice while it lasted.

But end tonight it most likely will.

According to Metal Bulletin, iron ore prices are much lower than the current spot price of US$63.63 a tonne – as their tweet below suggests.

Should iron ore prices fall back to between US$56 – US$57 a tonne, that would be a fall of around 12%. Over the longer term, many analysts and indeed BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) can’t see the current spot price being sustained.

Goldman Sachs analysts are forecasting a year-end price of US$35 a tonne, while even the China Iron and Steel Association (CISA) tipped the commodity to fall back to about US$40 a tonne in the short term.

Li Xinchuang, deputy secretary general of CISA asked, “How can the rally possibly be sustained?” adding, “The iron ore market remains massively oversupplied and steel consumption in China will extend declines this year.

As we wrote yesterday, more than 100 million tonnes of new iron ore supply is being added by Australian major producers to an already oversupplied market, including 55 million tonnes from Gina Rinehart’s Roy Hill mine alone.

Steel demand fell in China 5.4%, and will shrink another 3% this year Li says. Despite booming construction, domestic demand for steel is shrinking as China’s economy evolves from one led by growth in infrastructure construction and manufacturing to one led by consumers and services.

CISA also noted that China had passed its peak steel demand in 2014, and steel production will struggle to lift above 800 million tonnes in the next few decades (not all of which is destined for domestic use).

Foolish takeaway

Junior iron ore producers could be in for a rough day tomorrow – as could Fortescue Metals Group Limited (ASX: FMG), after its share price zoomed more than 20% higher earlier in the week.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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