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Iron ore set to exceed $100 billion annually

Australia’s biggest iron ore companies are set to surpass $100 billion worth of exports next year as our country’s volumes surge. According to JPMorgan, by 2018 over 900 million wet tonnes of the steel making ingredient will be produced thanks to expansions of existing mines and new projects coming online.

As many projects in the resources sector, particularly in Western Australia’s Pilbara region, move from construction to production phase they are likely to allow for huge increases in volumes. Rio Tinto (ASX: RIO), BHP (ASX: BHP) and Fortescue (ASX: FMG) are each expected to increase production in coming years. In the next year these will allow for supply growth of up to 130 million tonnes which, according to The Australian, will be worth around $103 billion if sold at the current prices of $US131.10 at an exchange rate of US$0.94.

However, many analysts are predicting that the price of iron ore will drop considerably in coming years as a result of the huge increases in supply not only here but overseas. Despite the recent price rally – partly due to restocking of Chinese mills ahead of the holiday period — the price of the steel making ingredient is facing a downwards trend.

iron
Source: Indexmundi.com

Without substantial offsetting by a lower AUD/USD, the $100 billion benchmark could prove a difficult goal to reach as early as next year.

Bulls in the market are forecasting prices between $US110 and $US125 per tonne in the short to medium term. Royal Bank of Canada (RBC) yesterday updated its guidance on its price to $US 120 per tonne for 2014 and $US110 per tonne for 2015. For the remainder of the 2013 calendar year it added, “We expect trading activity to be thin in the short term but we do not expect a price collapse in 2013.”

Foolish takeaway

Iron ore remains the most lucrative export for both our miners and country. Iron ore companies transitioning into the production phase for many of their major projects will enjoy a more stable Liberal government free from tax hikes and regulations which will reassure further investment going forward.

The amount of investment and profits could begin to plateau off the back of steep reductions in the past 18 months. However in this Fool’s opinion, many of our miners are facing considerably headwinds, amounts of uncertainty and, thanks a recent rise in stock prices, are too expensive to warrant a solid buying opportunity.

Instead investors could look for higher yielding stocks in other sectors such as the Motley Fool’s favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”

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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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