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Rebound in iron ore price keeps miners’ hopes alive

Australia’s most lucrative export has bounced back to $120 in recent days, giving hope to many of our biggest miners that rely on it for so much of their revenue. Pure play iron ore companies like Fortescue (ASX: FMG) and Atlas Iron (ASX: AGO) have been waiting for a day when they can catch breath and assess the long term price of the steelmaking ingredient.

Fortescue originally said that iron ore would find its place between $110 and $130 per tonne by the end of the year and this week’s rebound to $120 has got its hopes up. The price of iron ore seems to be directly correlated with the rate in which China grows. The recent price rally was spurred on by news that Chinese ports restocked an extra 6.5% of the steelmaking ingredient, after hitting a four year low in March.

With the transition of the Chinese economy from being almost completely manufacturing based to now focusing on services for the growing number of middle class, iron ore miners are worried. Already we have seen Fortescue downgrade its predicted total shipping volumes from 82–84 million tonnes per year to 80–82 million tonnes by the end of the financial year.

Even our biggest exporters like Rio Tinto (ASX: RIO) and BHP (ASX: BHP) are having a tough time in the current market conditions but Fortescue’s thinner margins have also been tough on shareholders. Investors are holding onto the fact that the company can sell vital assets in order to reduce its huge amount of debt. Since February the company has fallen 42%.

Foolish takeaway

All of our big miners rely on huge amounts of demand coming from China and when that slows, so does the price. Investors who can see some value in our mining services or smaller miners must be sure they don’t fall into a value trap because tightening margins on our mining stocks could have profound effects.

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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.

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