Few in the iron ore industry will remember 2014 with any fondness. The steelmaking ingredient was the worst performing major commodity, plummeting 50 per cent as a flood of new supply hit the market and swamped demand.

But it has started 2015 on the front foot with benchmark Australian ore advancing almost 8 per cent since Christmas. The question for the industry is whether this is a dead cat bounce or the start of a recovery in prices, which recently hit a five-and-a-half-year low of $65.60 a tonne.

So far few are convinced the rally will last. Analysts believe the bounce in prices is being driven by restocking at steel mills ahead of the Chinese new year and changes to reserve requirements for Chinese banks. With more supply set to come on line and demand in China weak, many believe prices will come under further pressure this year, even trading into the $50s.

This would be bad news for big mining houses such as BHP Billiton, Rio Tinto and Vale, which have spent billions of dollars expanding operations and generate most of their profits from iron ore.

“We view the upward correction as a similar experience to that recently encountered while climbing Skiddaw (the fourth highest mountain in England) . . . in a gale,” said analysts at Investec Securities in a report. “The climb was accomplished, but ultimately the prevailing wind was so strong that a hurried descent was inevitable.”

Indeed, the late 2014 euphoria has already started to wear off, according to Melinda Moore, analyst at Standard Bank. She says weak Chinese manufacturing data, the end of a key tax rebate on China steel exports and news that home purchase restrictions in China’s tier one cities would not be removed until later in the year all provided a reality check.

“Beijing’s safety checks on construction projects in the city, following a recent school accident, is also expected to impact immediate steel demand, if colder weather and the upcoming Chinese new holiday were not enough already,” she says.

Undeterred by the collapse in prices, the big iron ore producers are planning to add more tonnes to the market this year to meet China’s demand for steel. China buys about two-thirds of the world’s seaborne iron ore.

Analysts estimate BHP and Rio alone will crank up capacity by an extra 70m tonnes. Further supply will come from Vale and the Minas Rio project in Brazil.

“We are as sure as we can be that the majors aren’t going to pull back on their plans,” says Laura Brooks of CRU, a consultancy, adding that Chinese demand is therefore one of the key swing factors for the iron ore market.

However, anyone looking to increased demand from China’s struggling domestic steel sector in 2015 is likely to be disappointed. Morgan Stanley believes Chinese steel production and consumption could peak this year. Others are gloomier still.

J Capital Research says the slowdown in China’s residential property sector, where a construction boom has saddled many areas with oversupply, could lead to a 10 per cent reduction in steel production this year.

“Since 2008, the Chinese government has used stimulus measures to get people to build more housing than was needed,” says Tim Murray of J Capital. “That extra steel is now sitting in excess housing inventory . . . in order to work that down there needs to be negative growth for several years.”

So any hope for a recovery or stabilisation in prices rests on supply leaving the market.

“The best case scenario is that every single new tonne replaces a tonne that drops out,” says Ms Moore, who estimates 100m tonnes of new seaborne supply this year but just 0-30m tonnes of demand growth.

Rio believes lower prices helped 125m tonnes of supply out of the market last year mainly from high-cost privately owned mines in China and non-mainstream producers in countries such as Iran, Indonesia and Mexico. Rio and rival BHP are betting more supply will exit the 1.3bn-tonne-a-year seaborne market this year but others are not so sure.

Analysts say remaining suppliers could be difficult to dislodge. Weak oil prices and depreciating commodity currencies — such as the Australian dollar — have thrown some small and midsized producers a lifeline.

“Freight rates have also dropped dramatically,” says Ivan Szpakowski of Citi. “Along with foreign exchange this has helped keep exports competitive. So you are likely to see fewer cutbacks . . . than people were forecasting a few months ago.”

Then there is China, where large parts of the mining and steel industry are controlled by state-owned companies, where jobs not profits, are the priority.

“State-owned steel mills have operated for the last two years making losses and they did not cut production. So we should not expect state-owned Chinese iron ore mines to close just because they are lossmaking,” notes Mr Murray.