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Bank of America has warned that iron ore prices could fall below $US80 a tonne, which is a key level that would force a fresh wave of higher-cost mines to shut down as China’s steel crisis wreaks havoc.

The alert comes in the same week that Commonwealth Bank flagged that iron ore hitting $US80 a tonne was "not too far from current reality", and Goldman Sachs slashed its fourth-quarter forecast for Australia’s key export by 15 per cent.

Iron ore futures in Singapore touched a fresh low of $US89.25 a tonne on Thursday before spiking to $US92.15 a tonne. They are still down more than 35 per cent this year alone.

Weak demand in China has triggered the sharp sell-off as the nation’s deteriorating property sector weighs on steel prices. That has caused margins to turn deeply negative and means just 1 per cent of Chinese steel mills are profitable.

While some mills have started to reduce output, that has been offset by iron ore exports from Brazil and Australia rising to all-time highs. Bank of America expects that will leave the physical market with a surplus of 190 million tonnes, or 7.5 per cent of total supply, next year.

“Prices may fall below $US80 a tonne to incentivise either the large miners to stop adding to supply or take some of the higher cost operations, especially in China, out of the market,” BoA commodity strategist Michael Widmer wrote in a note to clients.

Iron ore prices around that level would inflict pain on more mining operations given around 170 million tonnes of production has a cost base of between $US80 and $US100 a tonne, and about 150 million tonnes have a cost base above $US90, according to BHP.

Morgan Stanley upgraded BHP to “overweight” on Thursday after more than two years of having the stock at “equal weight” and moved Fortescue up to equal weight following both companies’ recent share price declines.

Relief from Beijing

Commodity strategists are hopeful that Chinese policymakers will step in and defend the country’s economic growth target of around 5 per cent, which could stabilise prices.

Commonwealth Bank expects that will come in the form of an infrastructure spending package which will be announced in the fourth quarter. CBA’s FX team also expects the People’s Bank of China to cut interest rates and the required reserves ratio by the end of this month.

Similar stimulus was announced last October to ensure China’s economy hit its growth target, which fuelled a rally in iron ore prices from $US120 to $US141 a tonne through the fourth quarter.

Westpac agreed that Beijing would “deliver what is necessary” in coming months, but warned the damage already done meant growth of 4.8 per cent was about as close to the 5 per cent target as authorities could now get.

“The more entrenched fear and uncertainty become, the more risks skew towards a deeper and more prolonged period of weakness,” said Westpac’s head of international economics Elliot Clarke.

Westpac and Citi forecast iron ore will fall to $US85 a tonne. CBA is more optimistic, predicting that Chinese stimulus will support prices between $US100 to $US110 in the fourth quarter.