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Iron ore hits US$67: Here’s what you need to know

The iron ore price hasn’t been in the news much lately.

While it was the hot topic earlier in the year – with the key steelmaking ingredient plunging from 2013 levels – the freefalling oil price has been given more attention by the media recently.

But make no mistake, the iron ore price is still troublesome for our miners, and our economy as a whole.

Overnight, the commodity sunk to its lowest price since 2009 with supply growth continuing to outpace demand. It’s now trading at US$67.90 per dry tonne – 49.7% below its price at this time last year – with companies like BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) expanding output.

Meanwhile, others such as Mount Gibson Iron Limited (ASX: MGX) and Arrium Limited (ASX: ARI) may be struggling to remain afloat due to their high cost operations.

With China tipped to grow at a rate of 7.4% this year – its lowest growth rate in almost a quarter of a century – the Australian Department of Industry even cut its price estimate by 33% for next year to US$63 a metric tonne. Some estimates have suggested it will fall even lower than that – possibly into the US$50s.

The tumbling price will also see Western Australia record its first deficit in 15 years, which will likely result in payroll tax hikes and cuts to public sector wages. While a surplus of $175 million had been expected in May, it’s now expecting a deficit of $1.28 billion.

So what are investors to do?

Indeed, there are some stocks trading at basement prices which investors with a high tolerance for risk must surely be considering.

Take BC Iron Limited (ASX: BCI) as a perfect example. It’s shares are down more than 90% since the beginning of the year and are trading at just 48 cents. They’re down another 7.6% today.

Even Fortescue Metals Group Limited (ASX: FMG) must be attracting some attention. Australia’s third largest miner is trading 56% down for the year at $2.58, putting it on a trailing P/E ratio of just 2.8 times earnings.

While the prices might look appealing, it is important to remember that historical prices should not be relied upon as an indicator for future returns. While the shares could climb higher should the iron ore price rebound, the shares could just as likely plummet further if iron ore does continue to fall in value.

In fact, with some of the junior players, there’s a very real possibility that your entire investment could be lost if the company simply cannot make a profit anymore. Until such a time where there is more clarity over the direction of iron ore prices, or until shares fall much lower, investors would be wise to steer clear from the sector altogether.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned. You can follow Ryan on Twitter @ASXvalueinvest.

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