Here's why you should avoid the iron ore sector at all costs

Despite the enormity of their falls, investors are still avoiding companies like Arrium Ltd (ASX:ARI), BC Iron Limited (ASX:BCI) and Fortescue Metals Group Limited (ASX:FMG).

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You know things are bad when even bargain hunters and speculative traders are avoiding an entire sector.

That's what's happening to Australia's iron ore miners right now following on from Monday's 4.3% overnight crash which saw the commodity fall to its lowest price since May 2009 at US$63.54 a tonne, according to the Metal Bulletin Ltd.

Over the last 13 months, the commodity has more than halved in value which has proven devastating for some of the nation's higher cost miners. Arrium Ltd (ASX: ARI) and BC Iron Limited (ASX: BCI), for instance, have tumbled 88% and 91% over the last 12 months respectively, while Fortescue Metals Group Limited (ASX: FMG) has fallen 60%. Fortescue, which is Australia's third largest producer, even recorded a near six-year low just yesterday when its shares bottomed out at $1.92.

Iron Ore miners

Source: Google Finance

Usually, when a sector has fallen as heavily as has the iron ore sector has, bargain hunters swarm towards the stocks in an effort to catch the recovery. However, so unclear is the outlook for the commodity and the miners themselves that fund managers and speculative traders appear to be avoiding them at all costs.

The Australian Financial Review quoted Ric Ronge, head of global resources at fund manager Pengana Capital, as saying: "It's too hard a call at the moment, for us to be flooding our clients' money into iron ore." While the fund has positions in Fortescue, BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO), the "insolvency risk" facing the smaller miners makes them far too risky investment prospects.

Despite the enormity of the falls over the last year, there is a very real possibility that the stocks will continue to decline over the coming 12 months. That is particularly the case for miners with higher breakeven prices – some of which may already be operating at a loss. Investors wanting to dodge extreme volatility would be wise to avoid the sector altogether, for now.

Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned. You can follow Ryan on Twitter @ASXvalueinvest.

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