Should you buy iron ore miners?

After a decade of delivering enormous returns, the mining sector has largely been shunned by investors in the last two years or so as signs have emerged of a slow-down in Chinese growth, which has led to falls in commodity prices and enormous write-downs.

Now, as many of Australia’s iron ore miners climb up from their lows to reach fresh highs, many investors are becoming uneasy that they may have ‘missed the boat’, while many others are left wondering wasn’t the mining boom supposed to be over?

For instance, BHP Billiton (ASX: BHP) and Fortescue Metals Group (ASX: FMG) both hit fresh five-month highs yesterday following a period of steady gains. Since late June, BHP has climbed 19% whilst Fortescue has soared just over 50%, which was aided by its 7.5% gain on Monday. Meanwhile, Rio Tinto (ASX: RIO) and Arrium (ASX: ARI) have gained 25% and 63% in the same time frame.

These returns highlight the market’s rediscovered attraction to the sector – particularly following the much stronger than expected trade figures released by China last week, which revealed a 5.1% growth in imports and 10.9% growth in exports.

However, it is very difficult to imagine that these climbs can be sustained. Whilst the US$133 per tonne price tag for iron ore is significantly higher than its levels of around US$87 per tonne recorded in September last year, many analysts share the belief that its price has only soared recently due to the restocking of inventory levels by Chinese companies. In the third quarter, when demand is once again expected to fall, so should the price of the commodity and iron ore producers.

Foolish takeaway

Investors should not take past share performance for granted. Each of the companies mentioned above have seen shares at levels much higher than they are today, and there is no guarantee that those prices will be repeated anytime soon (if at all). Particularly following the recent climbs, investors would be wise to remain on the sidelines and wait for a higher margin of safety before buying into the sector.

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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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