Iron ore plunges to 7-month low

Australia’s three largest iron ore miners are trading in the red today as iron ore, a key steelmaking ingredient, continues to decline in value, falling to US$120.90 a tonne overnight and sitting at a seven-month low.

While Rio Tinto Limited (ASX: RIO), BHP Billiton Limited (ASX: BHP) and Fortescue Metals Group Limited (ASX: FMG) will each deliver their profit results over the next week and a half, the three have fallen 1%, 0.1% and 0.6% respectively today, with iron ore losing 10.5% of its value since the beginning of the calendar year.

Although each of the miners have focused heavily on reducing unnecessary spending and improving productivity, the falling commodity price will still impact on margins, which will apply a downward pressure to the companies’ share prices. So far for 2014, the three miners have conceded between 2.5% and 4.4% after climbing strongly in the second half of 2013.

While the declining commodity price could be largely attributed to seasonal factors (slower production as it is winter in the northern hemisphere), the Steel Index also said that prices had come under pressure from new measures to control pollution in China which came into effect in December. Of course, many analysts had been predicting that the commodity would fall this year, especially after it remained far more resilient than had been anticipated throughout the course of 2013. Some have even pegged it to fall below the US$100 a tonne mark at some stage this year.

For investors who are more bullish on the commodity, now could be a good opportunity to buy a position in Rio Tinto or Fortescue Metals Group, which are both heavily reliant on a strong iron ore price. Other investors who remain more cautious regarding the potential of iron ore could instead consider buying into BHP, which maintains far more diversified operations.

Foolish takeaway

When the miners release their profit results, investors will be looking at debt levels, reductions in capex, and the outlook for key commodity prices. Rio Tinto will report its final year earnings on Thursday while BHP and Fortescue will release theirs to the market next week.

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

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