Iron ore prices continue to drop, defying expectations for a rebound and leaving investors with a key question: how much worse will things get before they improve?

"I'm certainly on guard for an overshoot to the downside and I wouldn't be surprised if the current momentum kept going and we see a fall down to $70 a tonne," Ric Spooner, chief market analyst at CMC Markets told CNBC.

Prices are down 41 percent year to date and touched $79.80/ton last week - their lowest level since September 2009. The price decline flies in the face of market expectations; last month, when iron ore was trading around $90, a number of analysts told CNBC that prices were set to rebound.

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Supply and demand

Supply/demand fundamentals have been blamed for iron ore's slump. High prices on a historical basis led to a surge in global production, while slowing growth in China - the world's largest iron ore consumer - prompted worries about declining demand.

"When you get a big shift in the supply and demand dynamics of any commodity, market prices can go a lot further than the consensus thinks it will," Spooner said.

"In the short term we would have thought iron ore was approaching its bottom, but while we are still seeing [economic] numbers coming out of China suggesting signs of slowing, there will always be pressure to the downside," said David Lennox, resources analyst at Fat Prophets.

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Conor O'Malley of independent research firm View from the Peak, told CNBC the recent sharp slump in prices showed China's steel and iron ore industry had pressed the panic button and was now in destock mode.

"Underlying steel demand is slowing but it is not collapsing. Yet, today, perception matters more. No one wants to buy - let alone hold - anything. So its not a pretty picture and the market just needs to find some level of consolidation before limping into golden week in early October," he said, referring to a seven day public holiday in China starting on October 1.

China posted a number of weak economic data points in recent months, including a sharp fall in its August industrial production growth. Hopes of further stimulus to support the economy were dashed on Sunday when Chinese Finance Minister Lou Jiwei said the government will not significantly change its economic policy based on a single economic indicator.

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Fat Prophets' Lennox believes a decline to $70-75 is plausible considering that the world's two largest miners - BHP Billiton (ASX:BHP-AU) and Rio Tinto (ASX:RIO-AU) - both enjoy relatively low marginal costs of production at around $50/ton and would be able to withstand further declines.