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Look out below: Iron ore drops below US$140 a tonne

You may not have noticed.

Amid two ripper results from ANZ Bank (ASX: ANZ) and Westpac Banking Corporation (ASX: WBC) this week, including higher dividends from ANZ and a special dividend from Westpac, no one appears to have noticed that the iron ore price has fallen below US$130 a tonne.

Overnight, the commodity shed US$4.50 to hit US$129.40 a metric tonne.

So much for Fortescue Metals Group (ASX: FMG) chief executive Nev Power’s recent prediction that the price would hover around US$140 a tonne in the short term, because of low iron ore stocks. Mr power’s prediction of prices above US$120 a tonne of the long term appears to be more accurate.

Both Rio Tinto (ASX: RIO) and BHP Billiton (ASX: BHP) have predicted lower prices, with analysts generally agreeing that long-term prices of around US$120 a tonne are most likely. Brazil’s Vale, the world’s second-largest mining company says it will be difficult for the price of iron ore to fall below US$110 a tonne, as high cost producers are forced from the market, and iron ore supply is cut.

Fortescue, Rio and BHP plan to add a combined 235 million tonnes of new production by 2015, despite demand from China, the world’s largest steel maker and biggest consumer of iron ore, expected to taper off. Economics 101 says rising supply and falling demand means lower prices.

For Rio and Fortescue especially, falling iron ore prices will have a significant impact on their bottom lines, with Fortescue a pure-play iron ore miner and Rio’s iron ore division contributing around 90% of its earnings in 2012. BHP is less exposed, with significant earnings from petroleum and coal and other base metals.

Foolish takeaway

While no-one has really noticed the falling iron ore price so far – if the price continues to slide, expect miners and the commodity price to become front and centre news. Resource stocks that have taken a pummelling in the last month or so, could see further falls in their share prices.

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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). Motley Fool writer/analyst Mike King owns shares in BHP.

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