Despite a solid start to the year, iron ore bulls will be in for even more disappointment over the course of 2015 with the recovery tipped to be short-lived.
The commodity enjoyed its strongest weekly gain in 18 months at the beginning of this year amidst speculation that China would accelerate infrastructure projects to drive growth. With Chinese restocking also likely to drive demand, iron ore jumped from a five-year low of US$66.84 a tonne to now be trading at US$71.36, according to the Metal Bulletin Ltd.
Indeed, stocks in the mining sector have thrived from the recovery, with Fortescue Metals Group Limited (ASX: FMG) and Rio Tinto Limited (ASX: RIO) jumping 19% and 14% respectively since their lows. The higher cost miners have performed even better with Atlas Iron Limited (ASX: AGO), BC Iron Limited (ASX: BCI) and Arrium Ltd (ASX: ARI) up an astonishing 115%, 114% and 93% over the last few weeks, respectively.
Don't be fooled…
While it can be tempting to buy into a sector when stocks are making returns of that calibre, investors need to remember that the difficult times are by no means over. Although there are factors supporting the commodity's price in the near-term, the price is still tipped to fall in 2015 with the market remaining heavily oversupplied.
The fact is, Chinese growth is slowing while at the same time, companies like Rio Tinto and BHP Billiton Limited (ASX: BHP) are rapidly expanding their output. Any eighth-grade economics student would be able to tell you that this will eventually result in lower prices which will impact the earnings generated by each of the commodity's producers.
As it stands, the Australian Department of Industry predicts iron ore will trade for US$63 a tonne in 2015 while other analysts have it pegged to dip below US$60. At that price, those very miners who have rallied around 100% in the last three weeks could be operating at a loss and be forced to close their mines. Indeed, investors face the risk of losing their entire invested capital.
Rather than taking an unnecessarily high level of risk in the mining sector, investors should look at investment opportunities in other sectors which could generate far greater gains over the coming years.
