Any hope of an end-of-year rebound for the iron ore price now seems lost with the commodity tumbling a further 1.6% overnight to just US$81.70 a tonne, its lowest level in more than five years. While the red metal has now dropped in value by 39.5% since the beginning of the year, analysts are suggesting there could be even more pain in store for those exposed to the sector.
As the world's largest miners continue to ramp up their production levels, demand growth from China (the world's largest importer of the commodity) continues to decline. As any eighth grade economics student would point out, that's the perfect recipe for plummeting prices.
So What: While miners like BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) are sitting on fairly safe ground considering their diversification and lower costs, the nation's smaller miners are doing it tough.
In fact, the falling prices have already claimed two scalps in Termite Resources and Western Desert Resources – neither of which were able to turn a profit at these low prices. Others are certainly in danger too – miners such as Mount Gibson Iron Limited (ASX: MGX) and Atlas Iron Limited (ASX: AGO), which operate on high costs, could find themselves in serious trouble should the price head any lower.
Now What: As a result of the tumbling iron ore prices, the miners' shares have also taken a beating in recent months. While there are many investors who are keen on buying the shares now in the hope of being on the right end of a sudden recovery, that is a method I will certainly be avoiding as I believe shares will fall even further in the short-to-medium terms.
