A sudden jump in iron ore prices earlier this week saw a glimmer of hope return for Australian producers with share prices rallying as confidence grew in the market. However, that hope seems to have been short lived with the commodity once again returning to its downwards trajectory.
Since recovering to US$85.20 a tonne on Tuesday, the commodity has dropped back to just US$83 after toppling 1.4% overnight. At that price, it is sitting a remarkable 38.5% lower than at the beginning of the year, and analysts are suggesting there is even further to fall. In fact, so severe has been the commodity's fall from grace that analysts from Goldman Sachs are even referring to it as "the end of the Iron Age."
While many investors are hoping for a recovery to ease their pain, it is truly difficult to see that situation playing out. As any eighth-grade economics student would be able to point out, a decline in Chinese demand coupled with an increase in global supply can only cause the commodity's price to drop over time.
The nation's higher cost miners are the ones feeling the most pain. Junior miners Termite Resources and Western Desert Resources have already collapsed and there are fears others might not be too far behind. As the commodity's price continues to head south, even companies like Mount Gibson Iron Limited (ASX: MGX) and Atlas Iron Limited (ASX: AGO) could find themselves in serious trouble.
BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO), Australia's largest iron ore miners, are still making a healthy profit even at these prices, although there are concerns that their margins could be squeezed considerably which could impact their earnings growth.
Buy, Hold, or Sell?
I personally know a few investors who are keen on buying shares in the iron ore miners now in the hope of being on the right end of a sudden recovery. While I wish them the best of luck with that strategy, it is a method I will certainly be avoiding – at least for now. Although the iron ore prices have already dropped considerably, I strongly believe they will continue to fall over the medium term and that there could well be more pain in store for investors in the sector.
