Whilst the price tag on iron ore has rallied 21.5% since June on the back of stronger than expected trading from China, the commodity has conceded 2.6% of its value since the beginning of September, hinting that the price fall may come after all.
Experts and investors alike have been speculating on which direction the commodity’s price will go as it enters the traditionally weak third quarter, when Chinese production slows down as that country moves into winter. Many have argued that the price can only fall and that the levels around US$140 per tonne were unsustainable, while others have suggested that the price could certainly remain steady as demand remained strong.
London-based Standard Bank commodities analyst Melinda Moore even stated that iron ore shipments had struggled to keep up with the stronger than anticipated growth in demand throughout the year, when underlying iron ore demand in China grew by 6% to 8%. Moore believes that the fall in value this week has been driven by improved shipments which have better matched the demand levels.
However, it must be realised that China’s rate of growth is slowing and the level of global iron ore supply is increasing. In Australia alone, heavyweights such as BHP Billiton (ASX: BHP), Rio Tinto (ASX: RIO) and Fortescue Metals Group (ASX: FMG) have stated that they will ramp up their levels of production and continue aiming to cut costs.
Meanwhile, strong production from other countries such as Brazil continues, which will add further downwards pressure to commodity prices.
Shares in BHP, Rio and Fortescue have each soared over recent months as commodities have remained resilient at high levels. The good news for long-term investors is that diminishing commodity prices will drag down the share prices of exposed equities which will open up more attractive buying opportunities.
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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.