I would have thought that booking and cancelling a reward would have counted as activity. Obviously not...

But as Yllanes says, if you don't have any activity during a three-year period your entire balance expires. You can keep "combining Avios" but those will continue to be expired almost immediately.

But all you need to do is credit something... any real activity to your account and your Avios will never expire. Hopefully Iberia will take pity on you, as otherwise that will be an expensive lesson.