'What on earth is going on with the iron ore price?' – I hear you ask.
It's a question that the market wants answered after the commodity, which is Australia's most important export and a key ingredient used for making steel, surged higher into an official bull market overnight.
It rose 4.6% to trade at US$55.89 a tonne, according to data provided by the Metal Bulletin Ltd, giving it a total rise of 25% over the last three weeks. That compares to a multi-year low of roughly US$44 a tonne back on 8 July at which time it was stuck in an official bear market.
The iron ore sector certainly benefited today with companies such as BHP Billiton Limited (ASX: BHP), Fortescue Metals Group Limited (ASX: FMG) and Rio Tinto Limited (ASX: RIO) jumping 1.5%, 2.9% and 1.6%, respectively. Atlas Iron Limited (ASX: AGO) and BC Iron Limited (ASX: BCI) also rose 9.1% and 5.7% early in the session.
The commodity's recent gains can likely be attributed to weaker Australian exports which have been described as 'lacklustre' and 'disappointing' where it is believed that scheduled maintenance at some terminals may be impacting shipments.
Is it time to buy the miners?
The recent price swing has certainly defied the expectations of the broader market whereby most analysts were expecting it to fall significantly further. Citi, for instance, expects it to fall into the US$30s range before the end of the year – an opinion shared by Capital Economics – while Goldman Sachs believes it will fall below US$50 a tonne.
The fact is we are still stuck in an oversupply market. China's infrastructure growth is slowing with the country set to become more of a consumer economy while the world's largest miners continue to ramp up their production rates. Although Fortescue has promised to cease expansion in the 2016 financial year, rivals BHP, Rio Tinto and Vale will all push on with their expansion plans in order to drive average production costs lower.
Investors also need to consider the impact that Gina Rinehart's Roy Hill mine will have on the market, with the mine expected to enter production stage later this year. The impact of this will likely push prices lower (possibly into another bear market) which would be devastating for the miners and their shareholders.
Although the sector might seem tempting right now considering the commodity's recent strength, investors would be wise to remind themselves of the long-term forces at work which will likely result in negative shareholder returns over the coming years, and maybe even decades. Luckily, there are plenty of other great investment avenues ready to be explored instead.
