Here's the ominous forecast for iron ore to head under $40 later this year

In a potential blow to the Australian budget, fiscal position and Ausie miners, commodity analysts at Citibank have forecast the price of iron ore will fall below $40 a tonne in the second half of 2015.

They believe the rally to recent highs “likely marked the high point” and that fundamentals “appear to be weakening and positioning rolling over.”

Key to the “reiteration” of their previous view is that they believe the recent run of aggressive price rises across all Chinese assets markets, especially equities, is tempering.

They also highlight that miners and mines, like Atlas Iron, are restarting production. Chinese production is coming back online as well. The rebound in exports from Australia this month, after “soft” March and April throughput, is another reason to be bearish.

But as supply lifts demand remains weak and Chinese mill margins are under pressure.

Barchart.com – September 62 percent Fe CFR China Iron Ore

Citibank analysts believe that by September the price of iron ore will have fallen 23% from the current September futures price back to $40 or below. That’s a huge call. But the price has begun to break lower this past six days with Dalian September, and other exchanges, already down more than 5% during this period.

This could be bad news for the Australian economy if Citibank is right and will come as a huge blow to the federal Budget. It will also likely mean more RBA cuts if the Aussie dollar doesn’t fall heavily to compensate.

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