The forecast increase in global iron ore production capacity over the next two years coupled with higher Chinese scrap steel supply will likely drive down iron ore prices, possibly below the current marginal cost of iron ore production, Moody's Investors Services said in a report Wednesday.

Iron ore producers such as globally diversified miner Anglo American PLC (AAL.LN), Kazakhstan-focused Eurasian Natural Resources Corp. PLC (ENRC.LN), and Ukraine-based Ferrexpo PLC (FXPO.LN) are therefore "unlikely to benefit from returns of the magnitude witnessed in 2011," the credit ratings company said.

"With capacity expected to increase by more than 450 million tons per annum over the next two years, we expect supply constraints to ease--leading to lower prices."

In addition China's metal recyclers are proposing raising the total amount of scrap steel produced nationally to 160 million tons a year by 2015 from around 100 million tons a year in 2011, Moody's said.

"The simultaneous growth in Chinese scrap steel supply [and uncertainty about Chinese steel demand growth rates], could offset some of the positivity surrounding expected iron ore demand and push prices below the $120/ton barrier," Moody's said.

The barrier represents the marginal cost of producing iron ore in China where declining ore grades have made the country the most expensive region to produce iron ore. The spot price for iron ore fines with 62% ferrous content delivered into China was $143/ton on Tuesday, according to The Steel Index.

Moody's said that the iron ore divisions of the world's top three iron ore producers Vale S.A. (VALE), Rio Tinto PLC (RIO) and BHP Billiton PLC (BHP) will continue to perform strongly given their low production costs.

Nevertheless, "the spectacular performance of the past two years is unlikely to be maintained in 2012 and 2013," it added.

-By Alex MacDonald, Dow Jones Newswires; +44 (0)20 7842 9328; alex.macdonald@dowjones.com