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3 reasons there could be more bad news in store for iron ore stocks

Despite a rally in iron ore stocks on Thursday which sent Fortescue Metals Group Limited (ASX: FMG), Mount Gibson Iron Limited (ASX: MGX), Atlas Iron Limited (ASX: AGO) and BC Iron Limited (ASX: BCI) up 2.5%, 4.2%, 5.7% and 2.5% respectively, there are at least three reasons why investors should remain cautious about leaping head first back into the sector.

Firstly, this could turn out to be an unrealistic rally. The industry is facing a flood of new iron ore supply from the likes of BHP Billiton Limited (ASX: BHP). It is massively ramping up production volumes. This supply could mean prices remain subdued; many ‘in the know’ investors are believed to be cutting their exposure to iron ore.

Secondly, this time really could be different! While past drops have been met with corresponding rallies, this time around China’s demand for steel really may be waning. Reports of a huge overbuild of housing in China have been doing the rounds for years. With construction a key end user of iron ore, the effect of a housing slowdown could have serious repercussions.

Thirdly, the Bureau of Resources and Energy Economics recently released its 2015 iron ore price forecast which was for an average price of US$97 per tonne. Compared with prior year averages this will seriously dent profits for miners.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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