The share price trends of Vale SA (NYSE:VALE), Rio Tinto (NYSE:RIO), and BHP Billiton (NYSE:BHP) did a virtual 180 last year. Vale shares led the trio of iron ore mining giants, posting a massive 130% gain. The outlook for the miners this year, however, isn't clear. Here's what you need to understand about what moved prices in 2016, why it matters for 2017 and beyond, and the factors that are likely to come into play next.

Image of a steel worker in protective gear from the Worldsteel.org.

Steel industry employee in full gear. Image source:  World Steel  

The rebound

In early 2011, iron ore prices peaked at over $190 per metric ton. After that, it was all downhill for years, with prices reaching a nadir of around $40 per metric ton in early 2016. It should surprise no one that the shares of Vale, Rio, and BHP were hard hit over that span: Vale's shares, for example, fell more than 90% between 2011 and mid-January 2016.

Then things started to change. Iron ore prices roughly doubled between mid-January and December. Cue the rebound for this trio. Vale led the way, but Rio and BHP posted still-impressive gains of 32% and 38%, respectively.  

The iron rally was driven by demand from China, which produces about as much steel as the rest of the world combined. Brazil-based Vale sent roughly 55% of the iron it produced in the third quarter to China, and Rio and BHP are similarly dependent on the country across their broad, though iron-focused, commodity portfolios.   

Solid steel production in China was basically the main driver the iron ore price gains in 2016 -- and that's a potential problem.  

Some negatives to watch

If you dig a little deeper, it turns out that all is not well in iron ore just because Chinese demand remained solid in 2016. Despite the good year, Rio Tinto warned in mid-2016: "Growth in China has stabilized, but it is on a long transition path of slower and less commodity-intensive growth." The country's massive growth has, indeed, begun to decelerate. And China is looking to shut down its least-efficient steel mills in an effort to curb pollution and industry overcapacity. These factors could lead to reduced demand ahead for iron ore.  

Image source: The World Bank  

There are two additional complicating factors in play. Chinese steel mills built up their inventories ahead of that nation's New Year holiday, a week-long break for workers. That may have provided temporary support for iron ore prices by shifting some demand forward. And high metallurgical coal prices have led steelmakers to shift their purchases to the higher-quality iron ores provided by the major miners. These potentially temporary factors contributed to the higher prices of recent months.

Then there's the issue of supply. One of the big problems for miners during the long industry downturn was that production was outstripping demand. That imbalance appears to have largely faded away, but it could easily re-emerge. For example, Vale could increase its iron ore output by as much as 10% this year as it brings production up to speed at its low-cost S11D project site in Brazil. It expects to produce even more in the years ahead. BHP and Rio, meanwhile, are expecting to increase production in the low- to mid- single digit percentages during 2017. In other words, a supply/demand imbalance could still dog iron ore.

A bar chart showing Vale's projections for increased iron ore production over the next several years.

Vale production projections.  Image source: Vale SA  

Don't get too excited

Iron ore miners got a huge boost from broadly rising commodity prices in 2016. That's great news, but the supply and demand trends in the industry don't appear to have materially altered. Vale is the perfect example, as it brings the S11D project -- one of the world's largest and lowest-cost iron mines -- on line. It's not the only miner adding capacity. And while Chinese demand is key, the country's growth rate has been slowing -- suggesting that future demand from the world's most populous country may not be as robust as it has been in the recent past. Iron ore prices could keep rising, but after their strong rise last year, multiple factors contributing to a short-term surge in demand in early 2017, and less-than-supportive long-term industry trends, it's probably best for investors to enter 2017 with tempered enthusiasm for iron ore prices and iron ore miners.

Reuben Brewer has no position in any stocks mentioned. The Motley Fool owns shares of Companhia Vale. The Motley Fool has a disclosure policy.