For a commodity that symbolises strength, iron ore is looking ever weaker. On Monday, the Australian benchmark price of the steelmaking ingredient sank to $87.10 a tonne, taking the year-to-date fall to 35 per cent. The price is now just 40 cents above a five-year low.

The reason for the sharp plunge in the first half of the year was clear. The big three global producers – Vale, Rio Tinto and BHP Billiton, which all depend heavily on iron ore for their profitability – have drastically increased production and shipping volumes in 2014.

Most of this material has gone to China, which consumes about two-thirds of global seaborne iron ore. This “tsunami of supply growth” that has pushed the market into surplus has now stalled temporarily, according to Chris LaFemina, head of European metals and mining equity research, at Jefferies. The trouble is now on the other side of the equation: demand.

“The sentiment in the Chinese steel market has weakened a bit,” Mr LaFemina said. “When steel companies know that there is a plenty of iron available they can afford to wait. That pushes the price down.”

Chinese macroeconomic data published on Monday support the idea of flagging demand for industrial commodities. Factory sector growth fell to a three-month low in August, according to an HSBC survey, while the government’s official purchasing managers’ index also fell over the month. The numbers suggested that China’s stimulus measures were not yet sufficient to compensate for the weakness in the country’s property sector, a big user of steel – and thus iron ore.

With steel mills already well-supplied, and port sheds heaving with ore, the China Iron and Steel Association has urged factories to run down their inventories, rather than restocking, in anticipation of iron ore prices continuing to slide. That could happen unless the Chinese growth rebounds, says Melinda Moore, commodities strategist at Standard Bank.

“Analysts had expected Chinese iron ore consumption to rise by 3 to 5 per cent [in 2014]. Instead the rate is close to zero, and appears to be falling year-on-year during the third quarter,” said Ms Moore. “There’s scope for the price to fall further.”

That would hurt the industry, especially the smaller and higher cost miners. Producers in China have already reduced output in response to the lower prices, as have suppliers in Indonesia and Iran. London-listed miners operating in west Africa – where the spread of the Ebola virus is an additional negative factor – have seen their share prices tumble.

Rio Tinto reckons that 125m tonnes of high-cost iron ore supply will be cut in 2014, mostly in China. Along with its large competitors, the company is betting that these curtailments will prevent any further collapse in prices, which exceeded $150 a tonne as recently as March 2013. Not everyone is convinced that such a large chunk of Chinese supply will be cut, though, since decisions to shut state-owned mines do not only depend on economics.

For the big three global miners, much is at stake. A $1 drop in the average iron ore price wipes out $135m of annual net profit after tax at BHP Billiton. For Rio Tinto, the corresponding figure is $122m. In August alone, benchmark Australian ore, with a 62 per cent iron content, fell $7.60 a tonne, according to the The Steel Index. On an annual basis, this would equate to nearly a $1bn cut in profits for both companies.

Still, the big miners have a significant buffer thanks to their low cost bases. Rio Tinto said in the first half of the year it sold its Pilbara iron ore at an average price of $99 per wet metric tonne compared with a unit production cost of less than $21 per tonne, excluding royalties and freight costs. Sam Walsh, its chief executive, said in August that the company’s 66 per cent profit margin had been achieved “in an iron ore market that many people are describing as weak”.

“Now is not a time for the best iron ore producer in the world to take a step back,” Mr Walsh said. “Now is the time for others to really feel the consequences of the price against their operating costs and for them to make decisions.”

BHP Billiton is not retreating either, confident that the long-term future of the Chinese steel industry is bright. It expects to increase output by 10 per cent to 225m tonnes in 2015 – when the second wave of new global iron ore supply will jolt the market – but acknowledges that this will keep prices modest. Chief executive Andrew Mackenzie said in August it was “quite unlikely we will see prices north of $100 a tonne and our forecasts are based on that”.