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Iron ore to fall in fourth quarter

Whilst strong demand from China’s property and infrastructure sectors saw the country’s iron ore imports hit a record high of 74.58 million tonnes for September, analysts are expecting the commodity to fall in value in the fourth quarter during China’s winter period.

China’s September imports were up 8% compared to August’s figures as steel mills increased their production levels, which resulted in higher iron ore prices than many analysts had expected. After having averaged around US$126 per tonne in the second quarter, its price in the third quarter has averaged about US$130 per tonne. It is currently sitting at US$133.10 a tonne.

Whilst China’s demand has remained strong, Australian producers, including BHP Billiton (ASX: BHP), Rio Tinto (ASX: RIO), Fortescue Metals Group (ASX: FMG) and Arrium (ASX: ARI), have all ramped up their production levels. James Glenn, economist for National Australia Bank, believes that the increased levels of production would further act as a disincentive for Chinese mills to restock.

However, despite the strong headwinds facing the industry, the price tag on iron ore should remain between US$110 and US$130 per tonne, according to Daniel Hynes, a CIMB analyst. Hynes believes that the market would not move into oversupply territory until 2015.

Whilst China’s import figures for September were strong, the miners have recognised that they must reduce unnecessary capital spending and drastically cut costs to ensure long-term sustainability. The big miners are set to release their periodic production updates in the coming days, with Rio Tinto to release its report today. Fortescue will announce September results on Thursday and BHP will provide its report on October 22.

Foolish takeaway

Although share in the miners are currently trading significantly lower than where they were a few years ago, the volatility in the sector suggests that the risks still outweigh the potential benefits. As such, it would be wise to add these miners to your watchlist and wait for a much more attractive entry point.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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