Iron ore sinks: US$90 a tonne here we come?

Commodity sinks another 2% overnight, falling below US$110 a tonne

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The spot iron ore price dropped 2.2% overnight, taking the price down to US$108.60, below US$110 a tonne and is now off 9% off its recent peak of US$119.40 set on April 9, but it could be about to fall even further.

As a result, iron ore miners are down in early morning trade, with BC Iron Limited (ASX: BCI) losing 3.3% to $4.37, Fortescue Metals Group Limited (ASX: FMG) off 2.5% at $4.99 and Mount Gibson Iron Limited (ASX: MGX) also falling 2.5%.

The two majors, Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX: BHP) are down 1.1% and 0.7% respectively.

According to the National Australia Bank’s economics team, Chinese media reports that iron ore buyers will face higher financing costs from May 1 – one factor that appears to be driving the price down. Increasing production, particularly from Australia’s Pilbara region, increasing supply and the possibility of tug boat strike action could affect the world’s largest iron ore port, Port Hedland, are two other factors that may affect the commodity price in the next few weeks and months.

One Shanghai trader is reporting that a price beyond US$120 a tonne is unlikely, and he expects huge supply to come on stream in the second half of this year. Broker Morgan Stanley predicts that supply will outweigh demand by 80 million tonnes this year, and doubling to 158 million tonnes in 2015. Simple economics suggests that oversupply will place downward pressure on the iron ore price, unless demand increases to match supply.

Foolish takeaway

As you can see, the future direction of the iron ore price is hard to predict, but overall the picture seems to be showing further falls are in store for the key steel making ingredient. Smaller, higher cost iron ore miners may be the first to feel the effects of a lower price.

Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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