Iron ore prices have fallen to a five-month low of US$130.70 a tonne and are expected to soften further due to seasonal weakness in steel demand as well as a growing seaborne supply.
Iron ore miners, including BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO), Fortescue Metals Group Limited (ASX: FMG) and Arrium Ltd (ASX: ARI) rose strongly in the second-half of 2013, with the price of the steelmaking ingredient remaining much stronger than analysts had predicted.
However, weaker prices have reflected lower winter demand from Asian nations. Although recent figures showed a 10% increase in Chinese demand for the commodity to 820 million metric tonnes. Generally, Australian miners have been ramping up their production levels, while prices were relatively high. Now investors fear that iron ore's price will continue to fall, which would impact company earnings.
Due to these fears, investors sold shares heavily last week. While BHP and Rio Tinto lost 3.5% and 6.9% of their value respectively, their losses were dwarfed by the 10.7% loss recognised by Fortescue, which lost a further 1.2% on Monday to close at $5.14.
While Bell Potter analysts have reiterated their June 2014 half-year estimate of US$130 a tonne and an overall US$132 a tonne for the financial year, other analysts are remaining more cautious with some predicting a price range between US$125 to US$135 a tonne. However, further drops in the price of iron ore will be partially offset as the miners remain heavily focused on reducing operating costs and improving productivity.
Foolish takeaway
While the shares of the iron ore miners fell last week, investors have been presented with a more attractive entry point. However, investors should remain wary of the companies' reliance on iron ore as a generator of revenues. Rio Tinto and Fortescue both heavily rely on the commodity. BHP has much more diversified operations, making it the safer investment.
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