The iron ore price continued its rapid descent overnight, slipping 0.9% to a new six-year low at just US$55 a tonne, according to the Metal Bulletin. The commodity has lost 4.6% of its value this week, and an alarming 59% since January 2014.
So What: Iron ore prices have been falling sharply as a result of weak Chinese data indicating that demand growth will continue to slow, and because of the tidal wave of fresh supplies hitting the market.
Mining heavyweights BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO), Fortescue Metals Group Limited (ASX: FMG) and Brazil's Vale have all been ramping up their production rates to offset weaker prices, which has not helped the price environment.
Numerous analysts have cut their iron ore price forecasts as a result of this activity with many suggesting the commodity will find a floor at around US$50 a tonne. As highlighted by the Fairfax press, HSBC believes that price is the "pinch point" in the market, at which point even some of the bigger players will need to review their strategies.
While Fortescue's breakeven price is estimated to be around US$57 a tonne, according to UBS, Vale also produces lower quality ore meaning that it can't recognise the full benchmark price. However, it is the smaller miners who would be impacted the most, with many likely to be unable to turn a profit, therefore being squeezed from the market.
Now What: Unfortunately, there is no way of knowing exactly how low prices will fall meaning that there is an enormous level of risk for investors venturing into the sector. As such, you would be wise to steer clear and focus your attention on some of the market's safer and more promising opportunities, including the stock our top investment advisor just named his best stock to buy in 2015.
