Just when you thought iron ore prices couldn't get any worse...

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On Friday, the spot price for benchmark 62% iron ore fines fell to another fresh record low.

According to Metal Bulletin, the price fell by 1.77% to $40.03, extending this year’s decline to 43.8%. From October 12 alone the price has fallen close to 30%, largely due to tepid demand from the world’s largest consumer of iron ore – China – along with a continued ramping up of seaborne supply from the likes of Australia and Brazil.

According to analysts at the NAB, weakness from China’s construction sector – that which accounts for around half of the nation’s entire steel demand – largely explains the recent weakness in prices. Analysts at the bank suggest that China’s apparent steel consumption fell by almost 5% year-on-year in the first 10 months of 2015, due largely to weak activity levels across residential, commercial and office construction.

“In the first ten months of 2015, residential construction starts fell by almost 14%, while office and other commercial construction fell by 12% and 9.2% respectively,” said analysts at the bank in a note released late last week.

Citing forecasts from the World Steel Association, they note that China’s steel consumption will likely total 686 million tonnes in 2015 – a decrease of around 3.5% from 2014 – with consumption tipped to fall by a further 2.0% in 2016.

As the chart below reveals, supplied by the NAB, it appears that China’s steel consumption is now trending lower having hit a record high in 2014, leaving the annual growth rate in negative territory throughout the course of 2015.

Alongside weak domestic demand, the NAB states that China’s steel production fell by around 2.2% year-on-year during the first 10 months of the year, contributing to the persistent weakness seen in the iron ore price throughout 2015.

While this has seen Chinese iron ore production fall 8.5% during the first 10 months of this year – eliminating some lower-grade, high cost domestic supply – the decline has been far smaller than what many had expected given persistent weakness in prices.

As the chart below reveals, despite weakness in Chinese iron ore production, Chinese iron ore imports fell by just 0.5% for the year to October, a far smaller contraction than that seen in iron ore production, steel consumption and overall steel output within the nation.

Australian iron ore exports, up 7.4% to 635 million tonnes in the 10 months to October from the same period a year earlier, managed to buck the declining trend seen in steel production, steel demand and Chinese iron ore production. While this helped to boost export levels, it contributed to the continued fall in prices.

Analysts at the NAB suggest that this was largely miners “rebuilding market share at the expense of profits”. They note the recent deceleration in Australian iron ore export growth, seen in the chart below, will likely continue into 2016, suggesting that they only anticipate a modest expansion “at best” in 2016.

In response to expected weakness in Chinese steel demand and production, along with continued strong seaborne supply from offshore iron ore miners, the NAB predict that the average iron ore spot price for 2016 will be just $42 a tonne, well down on the $55 level forecast for 2015.

Without a strong uplift in Australian iron ore exports – something that NAB analysts don’t envisage at this point – that will continue to pressure the profitability of miners, and place mores stress on the federal budget deficit given expectations for significantly higher prices over the 2015/16 financial year.

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