Shares in iron ore miner Arrium Limited (ASX: ARI) plunged a further 4.8% on Monday after dropping 6% in trading last week.
With the iron ore price now trading just below US$91 a tonne after maintaining an average of US$135 a tonne through 2013, confidence is deteriorating for high-cost iron ore miners like Arrium, Mount Gibson Iron Limited (ASX: MGX) and Atlas Iron Limited (ASX: AGO).
While the three larger miners of the commodity, being Fortescue Metals Group Limited (ASX: FMG) and in particular BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO), will be able to cope with the lower price, the higher cost miners could struggle to make a profit should the iron ore price drop any lower. It is a popular belief amongst analysts that it could drop as low as US$80 a tonne over the coming 12 months.
Although Credit Suisse recently upgraded its recommendation from underperform to neutral, giving the stock a target price of $1.25, Deutsche Bank maintains a far more bearish outlook. The financial services company downgraded its recommendation from 'hold' to 'sell' on Monday, cutting its price target by 35% to just 65c. That reflects an 18% downside risk for investors who buy in today.
A far better alternative
Although the iron ore stocks are trading at considerable discounts compared to their prices at the beginning of the year, I am avoiding the sector because I believe there could well be further to fall.
