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Analysts lower expectations on iron ore

The volatility in the iron ore market has remained high over the last few weeks and continued on into the new financial year, causing analysts to lower their forecasts for the resource for the short and medium terms.

Over June, iron ore’s price ranged between US$111 and US$121 per tonne after having sat at a peak of US$158.90 per tonne in February. Whilst this level is above May’s price of US$110.40, analysts do not believe that the higher prices are sustainable.

Instead, Alexandra Knight, an analyst from National Australia Bank, has said that the recent rally has simply been caused by Chinese mills restocking inventories. The Australian Financial Review quoted Knight as saying, “While tentative restocking of iron ore by Chinese mills may keep demand elevated, this may only partly offset a slowdown in demand for steel production as elevated steel inventories are run down first”.

Meanwhile, UBS analysts have suggested that iron ore prices will decrease for the September quarter but will increase again for the fourth quarter.

Recognising that the mining boom is certainly over (with fears escalating of a potential financial crisis in China), iron ore miners such as BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO) have been working toward significantly reducing costs in order to remain profitable in the long term. Meanwhile, pure iron-ore players such as Atlas Iron (ASX: AGO) and Fortescue Metals Group (ASX: FMG) have felt the heat with reduced revenues over the year.

Although Australia’s Bureau of Resources and Energy Economics’ (BREE) currently believes that the price for iron ore will remain around US$112 through 2014, NAB analysts aren’t quite so optimistic and are anticipating that iron ore will be priced around US$100 for the year.

Foolish takeaway

As China’s growth slow-down continues, the market is lowering its expectations on iron ore miners. Although they’re trading at heavily discounted prices compared to recent years, investors would be wise to remain on the sidelines, and await guidance from annual reports before making any investment decisions.

Instead, The Australian Financial Review says “good quality Australian shares that have a long history of paying dividends are a real alternative to a term deposit.” Get “3 Stocks for the Great Dividend Boom” in our special FREE report. Click here now to find out the names, stock symbols, and full research for our three favourite income ideas, all completely free!

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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