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Analysts divided over direction of iron ore in 2014

Although concerns are mounting regarding an economic slowdown in China, a number of experts have stated that iron ore – a key steelmaking ingredient – can maintain its value, which is currently sitting just under US$131 a tonne.

While Australian miners such as BHP Billiton Limited  (ASX: BHP), Rio Tinto Limited  (ASX: RIO), Fortescue Metals Group Limited  (ASX: FMG) and Arrium Ltd  (ASX: ARI) are all ramping up their production levels, there are concerns that demand from China could begin to recede. The commodity hit its lowest price in five months yesterday at US$130.70 a tonne, and each of the miners fell heavily last week.

While demand for iron ore has remained strong, UBS commodities analyst Tom Price believes the setback is simply due to the northern winter period affecting trade flows. He believes that “a seasonal recovery after Chinese New Year will see trade flows expand again.” The Australian Financial Review also quoted Gavin Wendt, senior analyst at MineLife, as saying: “I think iron ore will perform solidly during 2014.” He forecast a price range between US$110 to US$150 per tonne.

Others have delivered a bleaker outlook for the commodity. While some have forecast a value closer to US$110 a tonne. Equity broker, CLSA, expects prices to “break below US$100 a tonne in the second half of the year.”

Foolish takeaway

There is no way of knowing which direction iron ore will go, or whether Chinese demand will remain as strong. For investors who have confidence that iron ore will remain strong in 2014, Fortescue and Rio Tinto could be good investment options given their heavy exposure to the commodity. Alternatively, BHP represents a safer alternative given its more diversified operations.

In addition to being a safer investment option for investors, BHP also offers a generous 3.3% fully franked dividend yield, which it will likely increase in 2014.

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

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