The price for Australia's largest export plunged more than 5 per cent on Friday as traders took stock of China's waning demand coming into winter and the wind-back of the US Federal Reserve's enormous bond buying program.

The spot price of iron ore on the Dalian Commodity Exchange slumped $US3.56 to $US66.09 a tonne on Friday morning, bringing the total fall for this month to 16 per cent.

A bump in the US dollar, courtesy of the US central bank indicating a slew of interest rate hikes are on the horizon, prompted the iron ore price to slide, given it, and most other commodities, are priced in US dollars.

"You can never really expect a drop of this magnitude, but in recent times the iron ore price has been buoyed by speculation," said Daniel Morgan, commodity analyst at UBS.

"Now front of mind for the market is a whole heap of policy changes in China that may impact demand."

Widespread environmental inspections are set to place pressure on steel output throughout China, while authorities are also vocal about enforcing closures in the coming months to combat excessive pollution levels in winter.

Further risking Chinese steel demand, Beijing said it would suspend construction of major public projects during winter to improve the capital's air quality.

The ruling Communist Party meets next month in the Chinese People's Congress and commodity traders are weighing the possibility the meeting may tilt economic policy in favour of reform and tighten the generous stimulus fuelling much of China's economic growth.

"There is also no shortage of both iron ore and steel inventories in China," says Tapas Strickland, economist at National Australia Bank.

Iron ore port stocks are down slightly from the recent record-high of 141.4 million tonnes in June, but they are still well above the 80 million that prevailed at this time last year, at 131.8 million tonnes for the week to September 15.

And supply looks set to keep ramping up, with India set to emerge from its monsoon season and begin bringing stock back online.

Further to that, Brazil's Vale, the world's biggest iron ore miner, is to increase its output to 400 million tonnes by next year, up from 360-380 million this year and Australia is expected to increase iron ore exports to 885 million tonnes in the fiscal year ending June 2018, up from 851 million in the year ended June 2017, the Department of Industry said in its latest quarterly resources outlook.

The Reserve Bank of Australia on Tuesday pointed to the shifting outlook for iron ore, saying: "Iron ore prices had been supported at higher levels because of sustained strong demand for steel in China. However, prices were expected to fall in the period ahead because of the ongoing expansion of global iron ore supply following an extended period of strong investment.

"Members also noted that Chinese steel production per capita was likely to be close to its peak and that growth in Chinese steel production would not add much to global demand for iron ore in the future."