It may be a long shot, but according to financial services group UBS, iron ore could fall in value significantly by the end of October to around US$70 per tonne from its current price of US$131.70 per tonne – an incredible 47% plunge in value!
Whilst the commodity has remained far more resilient than many had anticipated throughout the September quarter (sitting at around US$140 per tonne), the steelmaking ingredient will free-fall due to an expected seasonal drop-off in steel production rates in China, according to the group.
However, it seems that it's not all bad news, as the decline should be short-lived. A full-year average forecast of US$120 per tonne for 2013, as well as an average forecast of US$110 per tonne for 2014, have still been retained for the commodity.
UBS is suggesting that investors should take advantage of the price drop to pick up companies at cheaper valuations. Glyn Lawcock, managing director of resource research at UBS said, "We regard that as a buy opportunity because the backdrop doesn't change and the average price for this year and next year shows a level where all existing producers can still make money at."
For instance, when iron ore fell to US$110 per tonne in June, miners followed it into the red. Fortescue Metals Group (ASX: FMG) dropped as low as $2.87 and Mount Gibson Iron (ASX: MGX) dropped to 40.5c per share. Today, the two are priced at $4.81 and $0.75, respectively, resembling increases of 68% and 85%.
Heavyweights BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO) also fell significantly in value in June and have climbed considerably since.
Foolish takeaway
Although UBS believes that the miners will be better positioned to withstand a sudden fall in value now than they were in June, a sudden drop in the value of iron ore could open a prime opportunity for investors to buy stocks at a much more attractive valuation.
Understandably however, many investors will still want to avoid the risks and volatility that come with investing in the mining sector. Pleasingly, there are still plenty of alternative companies that could add significant value to your portfolio!
For instance, you could discover The Motley Fool's favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of "The Motley Fool's Top Dividend Stock for 2013-2014."
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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.
