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Iron ore rally unsustainable

Despite iron ore’s recent rally, which has seen the commodity climb to around US$122, experts are suggesting that those prices are unsustainable and will likely plummet in the September quarter.

The commodity climbed an impressive 7% last week and is currently trading around 10% higher than its levels in May, however, analysts at National Australia Bank have suggested that this is largely due to the restocking of inventories for Chinese companies.

Meanwhile, as demand decreases from the Chinese market, Australian companies are ramping up their supply of the resource. Mining heavyweights BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO), for instance, are both expanding to 290 million tonnes of production this year, according to The Australian Financial Review.

As demand decreases and supply increases, downwards pressure would be applied on the price of iron ore which would dramatically affect company revenues. On the other hand however, recent disruptions to supply in Brazil and mining bans in India will act in a positive way for our miners.

Foolish takeaway

Although there is still volatility facing the industry, BHP is reaching a much more attractive entry point. BHP’s operations are quite diversified, and therefore fluctuations in one market will not have such a dramatic effect as it could with other companies. For instance, Fortescue Metals Group (ASX: FMG), which is a pure iron ore player, would be more heavily affected should the resource fall in value, as experts have predicted will happen.

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

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