Iron ore staged a late rally overnight, rising nearly 3.6% to US$71.15 a tonne based on speculation that the Chinese government's stimulus policies could boost the demand for steel. It's the first time the commodity has traded above US$70 a tonne in roughly three weeks and has sparked a last minute rally in the mining sector.
The nation's smaller miners showed the strongest response to the price rise with BC Iron Limited (ASX: BCI), Atlas Iron Limited (ASX: AGO) and Arrium Ltd (ASX: ARI) all jumping between 5.3% and 6.5%. Fortescue Metals Group Limited (ASX: FMG) and Rio Tinto Limited (ASX: RIO) also rose 3.3% and 0.8% respectively while BHP Billiton Limited (ASX:BHP) actually fell by 0.6%, possibly due to its leverage to the falling oil price.
Of course, today's rally is a case of too-little too-late with the sector having suffered enormous losses over the course of 2014. While the price on iron ore has dropped more than 47% over the last 12 months, Atlas Iron, Arrium and BCI Iron have all dropped in excess of 87%. Fortescue has shed 53% while the lower cost bases and more diversified nature of BHP and Rio Tinto have helped limit their losses to 22% and 15% respectively.
The outlook
While many analysts believe the commodity won't fall much further in 2015, others are suggesting it could fall below US$60 a tonne. That scenario certainly isn't out of the question with a tidal wave of fresh supplies hitting the markets, coupled with declining Chinese demand.
The big miners would suffer from tightened margins but the big question mark would linger over the nation's smaller, higher-cost producers. While some are likely struggling to breakeven at the commodity's current price, US$60 a tonne would no doubt see some miners crumble. Indeed, the biggest hope is that Chinese stimulus can reignite demand which would bolster the ore price, but investors shouldn't speculate. Right now, the outlook for the sector remains unclear and investors should remain on the sidelines until the picture becomes clearer.
Rather than taking an unnecessarily high level of risk in the iron ore sector, there are plenty of other great ASX stocks which are also trading at extremely compelling prices.
