Here is Citi's forecast for iron ore prices from Investing.com

In a note on Friday, analysts at Citi Research pointed out that while the iron ore market is currently facing challenges, there are important factors to consider when assessing whether it is time to “catch the falling knife” or wait and see how things develop.

The price of iron ore, currently around $85 per tonne, is approaching a significant cost support level. “Our view that iron ore could reach $85 per tonne in the next three months has encountered little resistance,” the analysts said.

Investors' key questions revolve around what different iron ore price levels mean for steel demand in China, what data points to watch for signs of recovery, and what surprises market dynamics have brought over the past three months.

There have been some positive surprises in recent months that have supported iron ore demand. The use of scrap in steel production has declined significantly, which in turn is boosting demand for iron ore.

In addition, iron ore stocks at steel mills remain low, averaging only 18 days, compared to the historical average of 27 days.

And this despite record-high inventories in the ports. In addition, steel inventories at traders and steel mills are close to five-year lows for this time of year.

On the negative side, the expected stimulus from China has failed to materialise. Total Social Financing (TSF) has shrunk, which, if it continues, could potentially lead to the sharpest decline in decades.

In addition, real estate starts in China have fallen to levels not seen since 2005, and orders for infrastructure projects remain stagnant, partly due to the declining TSF.

Citi recommends focusing on several key indicators to identify signs of a positive turnaround in the iron ore market. A turnaround in TSF growth could be a sign of a recovery in Chinese steel demand, making it the most reliable indicator of an uptrend.

In addition, signs of a bottoming out in housing data, which are unlikely to reach 2019 levels, could signal an improvement in sentiment. In addition, significant supply disruptions at traditional low-cost suppliers could push prices higher.

For iron ore prices to stabilize at $85 per tonne, China's steel demand would need to decline by 6-9% annually from 2023 levels. This scenario is based on Citi's estimates of the price elasticity of supply from non-traditional iron ore sources, domestic Chinese supply and expensive traditional supply.

During the last major economic downturn in the steel industry in 2015, steel production in China fell by 2.3% year-on-year, while apparent demand fell by 4.3%.

Seasonally, iron ore prices typically rise from late September to early October and continue until the Chinese New Year. However, given current price levels, any recovery is likely to be muted. Expectations are around USD 110-120 per tonne at best.

In terms of supply, there were no significant disruptions from traditional suppliers such as Australia, Brazil and South Africa, and supply from these sources increased as expected. However, non-traditional supply, which is very price sensitive, fluctuated. There was an initial peak earlier in the year when prices were higher, but then a decline as prices fell.

China's domestic iron ore supply shows price elasticity, but data are volatile. Meanwhile, scrap supply, which normalized after a decline last year, has provided some support to iron ore demand as its use in steel production remains subdued.

The current price of iron ore is now approaching the upper end of the cost curve for traditional players, with $90 per tonne considered “soft support” and $80 per tonne considered “hard support”. At current prices, the iron ore market is already in the 95th percentile of the cost curve for listed companies, suggesting limited downside potential unless there is a significant change in demand dynamics.

Iron ore inventories at Chinese ports are declining slightly but remain close to their all-time highs. But what is particularly telling is that steel mill inventories are currently only sufficient for 18 days, well below the long-term average. This low level of steel mill inventory is a strong indicator of demand, as it reflects the mills' willingness to ramp up production if needed.

Similarly, steel inventories at traders and mills are at their lowest levels in five years, underscoring the cautious approach in the market and the potential for a future recovery in iron ore demand once these inventories need to be replenished.