Australia's largest mining stocks are acting as a key drag on the overall sharemarket today after the iron ore price appears to be in decline again.
After surging more than 34% in just five weeks, hitting a high of US$62.88 a tonne on the back of signs of slowing supply growth, the commodity has gradually given up its impressive gains and looks to be headed even lower. It experienced one of its heaviest falls in weeks overnight, dropping 3.5% to just US$58.53 a tonne, according to the Metal Bulletin.
Although the rally was enjoyable while it lasted, the writing has been on the wall for a long time. Chinese demand is slowing and miners around the world are increasing their supply levels.
While BHP Billiton Limited (ASX: BHP) and the Brazilian-based Vale both made suggestions that they could look to slow production (which acted as a catalyst behind the commodity's recent rally), smaller miners in the sector were always going to use the opportunity to increase their own supply levels, forcing the price back down again – just as analysts from UBS, Goldman Sachs and the ANZ bank had all predicted.
Fortescue Metals Group Limited (ASX: FMG) has been the biggest casualty amongst the major miners, with its shares slipping 6.8% to just $2.07. Rio Tinto Limited (ASX: RIO) has surrendered 2.7%, while BHP Billiton is down another 3.2%, giving it a total decline of 11.7% this week (although, it has been affected by the spinoff of South32 Ltd (ASX: S32)).
Although the Australian sharemarket is heavily weighted towards the miners, investors should do their best to avoid commodity producers. With commodity prices expected to extend their declines before the end of the year, exposure to the sector could result in significant losses. Luckily, there are plenty of other great businesses currently trading at very attractive prices, which could reap far greater returns.
