FEARS that iron ore prices are set to crumble in response to patchy Chinese economic data and the unfolding 20 per cent annual surge in exports from the Pilbara have re-emerged, forcing investors to place the earnings outlook for leading producers on high alert.

Prices for the key steelmaking raw material were sent sharply down on Monday and were lower again in Chinese futures trading yesterday.

Monday’s fall as measured by The Steel Index was $US3.20 or 2.7 per cent to $US113.30 a tonne. The sharp fall comes just as the producers and investors had grown relaxed on iron ore’s near-term price outlook after it had worked its way back from this year’s low of $US104.70 on March 10.

The latest fall was put down to the rise in stockpiles at Chinese ports to near record levels, along with another easing of bans in India, which have kept as much as 50 million tonnes annually off the seaborne market.

India’s Supreme Court lifted a ban on iron ore mining in Goa but restricted output to 20 million tonnes a year. It follows the lifting of bans in the biggest producing state, Karnataka, capped at 30 million tonnes a year.

The March 10 low for iron ore was reached after a shock one-day fall of $US9.50 a tonne or 8.3 per cent. That lent weight to the growing number of analyst calls — and a warning from BHP Billiton — that a growing supply surplus would see prices weaken from the second half of this year.

Iron ore — Australia’s biggest export earner last year at $US57 billion on government figures — is already down substantially on last year’s (calendar) average of $US135 a tonne.

According to TSI, the average for the year-to-date is now $US119.80. On forecast Australian exports for 2013-14, the lower prices represent a $US9.5bn ($10.15bn) revenue hit for the local industry, with government taxation receipts also hit.

But the flipside of Australia’s surging supply is that the federal government’s chief commodities forecaster, the Bureau of Resources and Energy Economics, is predicting a 35 per cent value lift in iron ore exports to $76bn as the mining boom transitions from a price-led to production-led phase.

Lower prices, and the potential for the more bleak forecasts for iron ore to be arrived at in a hurry, could nevertheless check the scale of capital returns that BHP this year, and Rio Tinto next year, have been planning to shower on shareholders. The speed on the debt reduction plans by the third-biggest producer, Fortescue, would also be checked.

Among the more gloomy assessments of iron ore’s near-term direction came from Citi this month. “Once the seasonal run-up in steel production has run its course we expect increased iron ore supply to drive ... prices down to $US90 a tonne in 2015 and $US80 a tonne in 2016,’’ Citi said.

Rio’s status as Australia’s biggest iron ore producer prompted investors to send its shares 63c, or 1 per cent, lower to $62.74 yesterday. The fall was despite the company continuing to generate massive margins at the current iron ore price. BHP was 9c weaker at $38.01 and Fortescue was off 1c to $5.32.