The current crisis facing the iron ore sector is not one that should be taken lightly.
Overnight, the commodity's spot price endured yet another excruciating setback, tumbling 4.4% to record a fresh five-year low at just US$71.80 a tonne. Iron ore has now lost almost 47% of its value since the beginning of this year as the world's largest miners continue to ramp up their production rates at the same time as global demand wanes.
Indeed, investors who believe a rebound for the commodity is due could be in for a very rude shock. As concerns grow regarding China's property market, some experts are predicting the steelmaking ingredient will change hands for just US$60 a tonne next year, while others have suggested it will fall into the US$50s. That could indicate a further 16-30% downside to today's price.
The upside is limited too with analysts at ANZ predicting that iron ore will not rise above US$100 again. It seems that reality is finally sinking in that the glory days are now almost certainly a thing of the past.
How will this impact the miners?
Of course, Australia's iron ore miners are directly affected by the commodity's fluctuations. Despite their low costs and enormous production rates, even our largest miners, BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO), will be affected as their margins take a hit.
But it's the nation's smaller miners, and those which rely solely on iron ore for their earnings, who will be hit the hardest due to their higher costs. Indeed, Atlas Iron Limited (ASX: AGO), BC Iron Limited (ASX: MGX) and Mount Gibson Iron Limited (ASX: MGX) are all trading between 3.9% and 13% lower this morning.
Over the course of the year, their losses balloon out to 81.7%, 88.5% and 63%, respectively.
Fortescue Metals Group Limited (ASX: FMG) shares have also crumbled. Not only is Fortescue a pure iron ore play, it also carries an enormous amount of debt. As the iron ore price drops, so too will its profitability which will make it increasingly difficult to pay down that debt while it could also be forced to cease dividend payments in the near-term. Its shares are down 5.2% today, while they have more than halved in value since the beginning of 2014.
What should investors do?
To put it simply, investors should avoid this sector altogether.
Although some fantastic profits could be made if the iron ore price did suddenly rebound, the medium-to-long-term outlooks for the commodity look very bleak and investors could be condemning themselves to enormous losses.
While that is particularly the case for the nation's smaller miners – who are certainly at risk of going bust – I'd even be avoiding BHP and Rio Tinto for now, at very least until the high level of volatility facing the sector begins to subside.
Rather than potentially risking it all in Australia's waning mining sector, I urge you to take a look at this ultra-promising ASX stock instead.
