The price of iron ore has plunged below US$55 a tonne on fresh concerns that Chinese demand will continue to decline.
According to the Metal Bulletin Ltd, the commodity fell to US$54.66 a tonne on Friday, which is its lowest price since at least May 2008 (when Metal Bulletin started compiling weekly prices). That represents a decline of 23% since the beginning of the year, following on from the agonising 47% collapse in 2014.
The reason behind the commodity's heavy fall is obvious. Chinese growth is slowing down rapidly which is of course reducing its level of demand. At the same time, the world's major producers such as BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Brazil's Vale are ramping up their low-cost output, flooding the market with unneeded supplies.
Indeed, the glut has caused enormous headaches for some of the nation's smaller miners who are struggling to remain afloat in the low price environment. While many (including Fortescue Metals Group Limited (ASX: FMG), BC Iron Limited (ASX: BCI) and Arrium Ltd (ASX: ARI)) could be operating at a loss right now, the impact on them could be catastrophic should prices fall any further.
Should you buy?
Given the heavy falls experienced by mining stocks, many investors are wondering whether now is the time to venture into the sector in the hope of profiting from a rebound. While Australia's Department of Industry and Science estimates the price will average US$60 a tonne for the year (indicating a recovery), the more common belief among investors is that the price will continue to fall over the course of 2015 – possibly as low as US$40 a tonne.
Unfortunately, there is no way of knowing where the commodity will head next but the basic economics (that is, supply is increasingly outweighing demand) suggest that further pain will be endured by the miners and investors who decide to take a punt on them. As such, investors would be wise to steer clear altogether.
