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Time to invest in iron ore stocks?

Rio Tinto (ASX: RIO), Australia’s biggest iron ore exporter, delivered a 71% fall in first-half earnings last week but its share price has climbed 10% in past month. The gains have prompted a more bullish outlook on the price of iron ore with some now expecting it to remain strong in the short term.

Rio’s first-half report, good iron ore prices, a stronger dollar and healthy data from China are rejuvenating the stock prices of many iron ore plays including Fortescue (ASX: FMG) and to some extent BHP (ASX: BHP) – up 14% and 8% respectively in the last month.

Despite a slightly encouraging short-term outlook, spring has proven to be a bad time for the price of iron ore. Fortescue boss Nev Power has said he expects the price to remain strong throughout this year because “China has once more proved the pessimists wrong”. However UBS commodities analyst Tom Price has said, “the iron ore prices will weaken and we are expecting a correction event around September or October on that basis”. Mr Price believes it could go below last year’s low of $86 per tonne.

Currently, China is the biggest importer of seaborne iron ore and its long-term transition away from a purely manufacturing-based economy coupled with an oversupply of iron ore has some analysts spooked. Top commodity experts believe the oversupply and reduced demand could result in an iron ore price of between $80 and $88 per tonne.

Foolish takeaway

Rio’s results last week are a reminder of the dangers of buying into iron ore stocks whilst the price of the commodity is at its highest point or exceptionally volatile. Earlier this year Goldman Sachs predicted a slight surplus of ore reserves for 2013 but said that number would shoot up to 215 million tonnes by 2016.

Ashraf Khan from Normura’s metals and mining research said “We expect Chinese steel production to disappoint in the coming years primarily on account of underlying structural issues of fragmentation and over capacity”. Perhaps now is not the time to be investing in a sector with a heightened amount of uncertainty; instead investors could look to other sectors with higher dividends and growth prospects.

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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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