Iron ore price falls from its 2-year high: Should you sell mining shares?

Fortescue Metals Group Limited (ASX:FMG) shares could come under pressure today after the iron ore price tumbled 2.5% overnight. Here's what you need to know…

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On Monday the iron ore price reached a new 27-month high when the benchmark 62% fines grade surged to US$83.65 a tonne according to Metal Bulletin.

This was a big surprise considering Chinese stockpiles are at record highs and the market was largely expecting the metal to start to retreat in 2017.

But great news for the likes of Fortescue Metals Group Limited (ASX: FMG), Rio Tinto Limited (ASX: RIO), and Atlas Iron Limited (ASX: AGO), who are enjoying bumper profits with prices at these levels.

Whilst speculative forces may be at play here once again, I feel it could also be a case of restocking ahead of the upcoming Lunar New Year. The week-long holiday starts at the end of next week and demand traditionally picks up ahead of it.

Because of this I wouldn't expect the rally to continue for too much longer. In fact, cracks may already be starting to show.

The iron ore rollercoaster ride continued overnight when the spot price for the benchmark 62% fines grade, inexplicably fell 2.5% to US$81.55 a tonne.

Could it drop further from here?

I believe it should fall further from here, but whether or not it does is another question. With Chinese stockpiles at record highs and supply expected to increase in Australia and Brazil this year, I expect to see a surplus in iron ore.

If this occurs then I can see the price falling significantly lower from current levels to around US$60 a tonne or perhaps even lower.

This would be a big disappointment for Fortescue and fellow iron ore miners, and no doubt put significant pressure on their respective share prices.

Whilst I'm a big fan of Fortescue and believe the miner's transformation has been incredible, it's not something I would choose to invest in at this point. Due to the volatility in iron ore prices, I believe there is far more downside risk than upside potential for investors at this point in time.

I would suggest revisiting Fortescue when iron ore prices settle at more reasonable valuations.

Motley Fool contributor James Mickleboro 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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