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Are Australia’s iron ore miners facing a catastrophe?

Australian investors should spare themselves from the pain that will likely come from the iron ore sector in the foreseeable future.

Although most of the commodity’s miners have risen in price today – despite a 0.7% decline in the iron ore price on Friday – the days in the black could well be numbered with a number of analysts forecasting the commodity to fall much, much further in the near future.

As it stands, iron ore is trading hands for US$75.47 – down more than 44% since the beginning of the year. However, some Chinese traders are suggesting the commodity will be trading below US$60 a tonne next year with domestic property market conditions not expected to improve. In fact, some have even forecast the steelmaking ingredient to fall into the US$50s at some point next year. If those forecasts play out, that could mean…

A further 20-30% downside for the iron ore price

It’s certainly a realistic situation, and it could prove catastrophic for the nation’s miners.

While demand growth for the commodity is waning, companies like BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG) are aggressively increasing their production rates. While that’s good for their production costs and should help to offset the lower price environment, it’s not so good for smaller miners such as Atlas Iron Limited (ASX: AGO) and BCI Iron Limited (ASX: BCI) – both of which have seen their shares crumble in 2014.

While some investors will no doubt be interested in catching a potential ‘turnaround’, they run the risk of losing their entire investment amount. Should iron ore prices continue to fall, the smaller miners could be forced to close their doors, while the bigger miners could see their profits take a dive. As such, investors should avoid the iron ore sector altogether and look to capitalise on other attractive opportunities presenting themselves today…

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

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