Iron ore: Who let the bears out?

Spot iron ore entered China's Golden Week holiday at $104.20 a tonne recovering from the worst quarterly performance in history.

The steelmaking ingredient has clawed back more than 20% of its value since hitting a three-and-a-half year low of $86.70 on September 5.

Iron ore hit an all time record in February last year of over $190 a tonne. By October 2011 it was still holding above $170 a tonne, but then in less than a month it suffered a mini-crash to below $120 a tonne.

Now many industry analysts and some producers see signs that the price of iron ore may start to gap lower again thanks to the commodity's tight relationship to China.

The iron ore market is all about China.

The country consumes more than 60% of the 1 billion tonne global seaborne trade in iron ore. China almost produces more steel than the rest of the world combined.

The price of copper – the traditional leading indicator of GDP growth thanks to its widespread use in industry – is up 22% from last year.

But many argue that due to industry specific factors such as tight supply, warehousing practices and good ol' market speculation, copper no longer fulfills that role.

At least not when it comes to China – to gain insights into the performance of the world's second largest economy look at that the price of iron ore.

Growth in China appears to be slowing more drastically than expected despite concerted efforts by the communist leadership to induce a new growth spurt through infrastructure spending.

Bloomberg on Wednesday quotes Kieran Davies, chief economist at Barclays Capital in Sydney, as saying in a research note that "the price of iron ore is the canary in the coal mine."

Iron may plunge as low as $50 a tonne before the middle of next year Andy Xie, a former Morgan Stanley chief Asia-Pacific economist told CNBC last month.

Xie is not that much of an outlier on the outlook for iron ore – a Bloomberg survey show the majority of analysts predict prices are set to fall for four consecutive years starting in 2014.

Cutbacks in capital notwithstanding, 2014 would also see much more iron ore coming onto the market as expansion projects in Brazil, Canada and Australia start producing and Indian exports resume.

While it is not surprising that producers still see good years ahead, Alberto Calderon, BHP Billiton's corporate development head, acknowledged to an industry audience in Australia a fortnight ago that the heady days of 2011 – a function of major supply demand/imbalances in China – would not be seen again.

$50 a tonne would constitute more than a six year low – it's a price more associated with an iron ore industry characterized by secret negotiations and annual contracts.

It seems quaint today but that was how the market functioned until as late as 2008.

It's worth remembering that the price of 62% iron ore never strayed from $10 – 14 a tonne for more than 20 years (1991 was a banner year – miners got all of $15.03 for their haul).

RELATED:

Vale says iron ore won't go below $100 – 40% of Chinese output is already off the market >>

How depressing is Australia's official 2013 iron ore and coking coal chart >>

China bulls chase iron ore 25% higher in just two weeks >>

Wrong again Dr Copper: The best indicator of Chinese growth has slowed to 3.6% >>

Iron ore red alert: China's steel output could shrink for the first time in 31 years >>

Here is China's Bridge to Nowhere. It also happens to be the world's longest >>

Forget gold, IRON ORE is the story of the decade >>