Iron ore has rapidly fallen into a bear market as worries about a trade war between the US and China add to concerns about expanding supply and cutbacks in China’s steel industry.

Prices have dropped by nearly one fifth since the start of March with benchmark prices sliding to around $US62 a tonne amid record stockpiles at Chinese ports.

The Federal Government predicts the price of Australia’s biggest export could fall 20 per cent from 2017 to an average price of $51.50 a tonne in 2018 because of slowing demand in China as Beijing clamps down on steel production to curb pollution.

That is lower than other forecasts in the market by international banks. UBS thinks prices will average $US67 a tonne this year and ANZ has forecast an average price of $US69 for 2018.

It is the miners with low grade iron ore and a higher cost of production that are in the firing line because Chinese steel mills prefer higher quality iron ore from the world’s biggest producers, BHP, Rio Tinto and Brazil’s Vale.

Adding to the iron ore storm clouds, US President Donald Trump last month expanded tariffs on Chinese imports in an effort to slash the huge US trade deficit with China.

Tribeca Investment Partners’ portfolio manager, Jun Bei Liu, said fear of a trade war between Washington and Beijing had already hurt the share prices of Australian iron ore miners.

“They are commodities meant to be leveraged to the improvement in global growth, and a potential breakout of the trade war will slow down that growth and that means the demand for their product will fall and that means their earnings won’t look so rosy,” she told the ABC.

Global investment house UBS thinks a trade war between the world’s two biggest economies can be averted, but UBS global commodity analyst Lachlan Shaw said a full-blown trade dispute between the US and China would see commodity prices plunge.

“On the basis of world trade volumes falling, world steel production falling and on that basis world iron ore demand is falling, it’s not impossible to see the iron ore price trading in a range of perhaps $US45 a tonne delivered into China,” he said.

That is around $US20 a tonne less than where iron ore is trading now.

And that makes miners with lower quality iron ore and a higher cost of production the meat in the sandwich, according to ANZ senior commodity strategist Daniel Hynes.

“There wouldn’t be any winners out of it to be honest if we did see that scenario eventuate, but certainly under the current structure in the market we are seeing, the two-tiered market, the lower grade material would probably suffer more than the higher grade for sure,” Mr Hynes said.

Small miners close down

These miners are already under pressure as China cracks down on pollution by closing dirtier steel factories.

The message was rammed home at last month’s annual meeting of the Chinese parliament, the National People’s Congress, where Premier Li Keqiang unveiled a further 30 million tonnes of planned cuts in steel production for the coming year.

The crackdown on steel production in China has widened the price gap between high and low-quality iron ore and Mr Hynes expects that scenario to continue.

“We expect to see that spread between the high grade, low grade [to] remain high, and demand for imported iron ore coming from Brazil and Australia to remain strong,” he said.

The biggest iron ore producer in the US, Cliff’s Natural Resources, is expected to shut down its West Australian mine by the end of the year.

Lachlan Shaw from UBS said smaller miners in China and India had already closed down.

“We’ve seen high-cost producers in China leave the trade in recent years, there are high-cost producers elsewhere in the world that are also leaving the trade,” he said.

“Over time we would expect the trade to rationalise somewhat, the high cost, tier 3, tier 2 producers at the top of the cost curve some of those producers won’t survive.

“Tier 2 and tier 3 producers around the world certainly have challenges in an environment where demand growth is slowing.

“Cliffs here in Australia, Atlas Iron would certainly be in that category,” he said.

Big miner Fortescue Metals is also under pressure after telling investors last week it expected to get around two thirds of the benchmark iron ore price over the June quarter, that is less than $40 a tonne for its low grade iron ore.

Mr Shaw said that Fortescue was being squeezed but he believed the world’s fourth biggest iron ore miner would survive the latest trouble in the volatile market.

“Even though they are not getting quite the same headline price in terms of low grade discounts, their low-cost base means they are still making attractive margins and really healthy cash flows,” he said.

“When you look at Fortescue’s business they’ve got some challenges around product quality and position in the market and margin, but fundamentally it’s a very high-quality business.”

There will be winners and losers from a Trump trade war but it looks like the high-grade iron ore miners are in the box seat.