IRON ore prices have fallen to fresh five-year lows, raising fears that the much-vaunted retracement to higher price levels for Australia’s biggest export earner in the back end of the year will not occur.

Spot prices on Friday closed down $US1.30 a tonne or 1.6 per cent at $US81.70 a tonne, according to the Steel Index. The fall stopped a tentative recovery in prices from a low of $US81.90 a tonne on September 11 in its tracks.

The average price for the year to date is now $US105.20 a tonne, down from last calendar year’s average of $US135 a tonne.

Should the current year-to-date average hold — which is unlikely, given the retreat to $US81.70 — the Australian industry faces a $US21 billion revenue hit, and $US35bn if $US85 were to become the year’s average.

The fall in the exchange rate to below US90c is providing some relief. Since iron ore’s fall accelerated from $US120 a tonne in mid-April, the currency has fallen by 5.3 per cent. But that has only been enough to soften the 32 per cent fall in US-dollar iron ore prices to a 28 per cent fall in Australian dollars.

A continuation of the current price raises viability questions for the higher-cost producers, with two scalps already claimed by the price slump — the Cairn Hill mine in South Australia and the Roper Bar mine in the Northern ¬Territory.

Analysts at Standard Bank said on Friday that the fourth quarter (December) supply-demand balances for the iron ore sector were shaping up to “look relatively ugly’’.

“If (Chinese) pig iron output rates follow patterns of past years and fall, on a volume basis, by up to 5 million tonnes a month, this is likely to have a far greater negative impact on pricing than in past years when Australia’s supply glut was not yet evident,’’ the bank said. “While some (steel) mills may try to retain higher stocks in anticipation of the March (2015) restock season, others, suffering tighter cashflows, may not enjoy such luxuries and be forced into destocking to prevailing demand conditions, rather than future hopes.’

“As a result, we are more concerned about fourth quarter downward price performance than any prior year for the past decade — apart from the GFC in 2008.’’

Conventional wisdom, like that espoused last week by the ¬Bureau of Resources and Energy Economics, has been that iron ore prices will recover to a trading range of $US90-$US95 a tonne over the next five years as China’s steel production rises from about 800 million tonnes to reach 900-950 million tonnes a year.

BREE has not ruled out the possibility of prices falling to the low $US70s for a time. “It could go down that far, but we couldn’t see it being sustained at that sort of price level. We still expect a downturn in price. The peaks won’t be as high and the troughs will be a bit lower,” BREE deputy executive director Wayne Calder told The Australian last week.