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Fortescue Metals on the up?

Iron ore miner Fortescue Metals Group (ASX: FMG) shares are up over 4% in afternoon trading after broker JPMorgan suggested the company was cheap, and upgraded it to overweight.

The news appears to have spurred other iron ore miners higher, with Atlas Iron (ASX: AGO) and Mount Gibson Iron (ASX: MGX) rising. Even mining giant Rio Tinto Limited (ASX: RIO) got in on the act, adding around 1.3% in afternoon trade, but still a long way away from its 52 week high of $72.30 set last month.

JPMorgan, it seems, is snubbing the views of the major iron ore miners themselves as well as other experts, suggesting predictions of further falls in the iron ore price may have been greatly exaggerated. Several analysts and commentators have forecast a price below US$100 a tonne in the near-term, due to deterioration in both sides of the supply-demand equation. Global iron ore production is set to rise by 120 million tonnes this year, according to China’s National Development and Reform Commission (NDRC), but China’s demand will only rise by 50 million tonnes. The NDRC says industry forecasts show global supplies will rise by more than 300 million tonnes over the next two years.

As the NDRC said, “Looking at the trends, oversupply in iron ore is inevitable”.

Investment bank Goldman Sachs says that it sees fairly stable prices this year, before a steady decline to US$80 a tonne in 2016. The broker says that the market is headed for a prolonged period of oversupply.

On the demand side, we know that China’s thirst for iron ore is not growing as fast as the miners are producing it. We’ve also seen steelmakers in Japan and Europe slashing output and jobs as demand from car manufacturers and the like slows. Steel output growth has slowed to low single digits as a result.

Foolish takeaway

At US$80 a tonne, almost all Chines iron ore producers will be uneconomical, as well as many smaller global iron ore miners. The three largest iron ore producers, Rio, BHP Billiton and Brazil’s Vale have extremely low cash costs compared to the rest of the market, but will still see their earnings take a big hit. At least they won’t be fighting for survival.

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More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Mike King owns shares in BHP.

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