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Has the iron ore price bottomed out?

It’s been a shocking run for iron ore investors over the last few years, but one industry insider believes that the worst may finally be over.

According to The Australian Financial Review, Nev Power, CEO of industry giant Fortescue Metals Group Limited (ASX: FMG), believes that the iron ore price has finally stabilised. It hit a low of around US$38 a tonne late last year – down from about US$185 a tonne in 2011 – but has jumped above US$50 in the time since.

One tonne is currently fetching US$54.57, after slipping 0.3% overnight, based on data from The Metal Bulletin.

The AFR quoted Power as saying: “If you look at where it [the price] is today compared to the cost of production on the global supply curve, I think it’s probably somewhere near the bottom and should be able to stabilise from here.”

Indeed, much of that belief relies on China’s ability to deliver on its growth prospects over the coming years. One factor that could get in the way, however, is that China is also trying to transition away from an economy driven predominantly by industrial growth towards one that is driven by consumption and services. That would mean less demand growth for resources such as iron ore and coal.

Meanwhile, others are also not quite so confident in China’s ability to grow at such an ambitious rate of 6.5% annually. Power’s beliefs also contrast to those expressed by executives at fellow iron ore miner BHP Billiton Limited (ASX: BHP) who expect the challenging conditions to continue for the foreseeable future.

After all, there is still a huge amount of supply coming into the market, which is simply outweighing demand growth and thus acting as a downward force on the iron ore price. It is this (combined with its enormous debt load) that finally pushed Arrium Ltd (ASX: ARI) into voluntary administration on Thursday, while others in the industry are also at threat if conditions don’t improve (or worse, if Power is proven wrong and conditions do decline from here).

One way or another, it’s impossible to tell at this point where the iron ore price will go from here. It is a risky bet, however, and one that investors with a low tolerance for risk may want to avoid.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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