Iron ore plunges to 5-year low: 3 important decisions facing investors

It's been another tough day at the office for Australia's iron ore miners with BHP Billiton Limited (ASX:BHP), Rio Tinto Limited (ASX:RIO) and Fortescue Metals Group Limited (ASX:FMG) all trading in the red.

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It's been another tough day at the office for Australia's iron ore miners.

The commodity endured a further 0.9% drop overnight and is now trading at just US$77.10 a tonne – its lowest price since September 2009. Shares in the miners have followed suite with companies like Atlas Iron Limited (ASX: AGO), BC Iron Limited (ASX: BCI) and Mount Gibson Iron Limited (ASX: MGX) dropping between 4.5% and 6.2%.

The nation's larger miners, being BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG) haven't managed to escape the market's wrath either, with the stocks trading 1.2%, 0.9% and 2.4% lower, respectively.

The fall comes amidst growing concerns regarding the outlook for the Chinese economy, combined with a tidal wave of new supplies from the world's largest producers. As highlighted by The Australian this morning, the iron ore price has experienced double-digit percentage declines in every quarter since the beginning of the year.

What should investors do?

Investors really have three choices in this situation.

First, they can buy into the smaller mining stocks hoping to catch a rebound in prices. Indeed, demand for iron ore can sometimes increase in the last quarter due to Chinese stockpiling ahead of winter. A sharp rebound in the commodity's price could deliver a very nice short-term gain.

Second, investors could buy into the nation's largest miners, which enjoy lower breakeven prices and are far better equipped to cope in a low price environment. BHP would be the obvious choice here, given its high level of diversification.

Finally, investors can choose to ignore the sector altogether. Investors who take this option will keep their money on the sidelines and ignore the urge to act on the temptation of making a quick buck.

I would suggest the final option is the one investors should be taking right now. I'd certainly be avoiding the smaller miners, given their high costs and the possibility of even lower iron ore prices, while I'd be inclined to say the big miners' shares will fall further from here as a result of the high level of volatility blanketing the sector.

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

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