How low will iron ore go?

BHP Billiton Limited (ASX:BHP), Rio Tinto Limited (ASX:RIO) and Fortescue Metals Group Limited (ASX:FMG) are all boosting production to offset a weakening iron ore price.

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The iron ore price has sunk below US$89 per tonne taking the bulk commodity to a new two-year low.

The fall in price comes in the wake of fresh concerns over the strength of the Chinese economy and after the managing director of global miner BHP Billiton Limited (ASX: BHP), Andrew MacKenzie, commented that investors should not expect the price of the commodity to return to an average above US$100 per tonne anytime soon.

So far in calendar year 2014, the iron ore price has dropped around 35%. Of the majors, shareholders in Fortescue Metals Group Limited (ASX: FMG) have fared the worst given the company's sole exposure to iron ore, Fortescue's share price is down 27% this year. Meanwhile, shareholders in BHP Billiton and Rio Tinto Limited (ASX: RIO) have been largely shielded from the weaker iron ore price thanks to their diversified asset bases. To date BHP and Rio are down just 1.9% and 5.6% respectively. In many ways investors in Rio Tinto have been particularly lucky that the fall in Rio's share price has been so muted, given the heavy earnings weighting the miner has to iron ore despite its diversity of assets.

How low can it go?

Some analysts are speculating that iron ore could drop as low as US$80 per tonne but of course no one really knows. The good news is that even at those levels all three of Australia's major iron ore miners should still be profitable, although Fortescue only marginally.

Right now it would appear that the risks are still to the downside and it is perhaps years before conservative investors should bother looking closely at investing in the sector again. That's why I'm looking to the energy sector for my commodity exposure.

Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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