Iron ore has somehow managed to defy bearish market sentiment over the last few weeks, having recovered from a 10-year low to bounce back above the US$50 a tonne mark on Friday.
According to data from the Metal Bulletin, the commodity rose 2.3% during the session to be trading at US$50.93 a tonne, compared to its recent low beneath US$47 a tonne. While iron ore has been on something of a tear recently; the rebound could well be short-lived.
Analysts and economists have taken turns in berating the outlook for the commodity, with some predicting prices will fall towards US$40 a tonne by 2017 while others, including Citi and Australia’s own Treasurer, Joe Hockey, have suggested it could fall below that level this year.
In a recent interview with The Australian Financial Review, Hockey said the government is now considering what impact a price of just US$35 a tonne would have on the national budget. That’s US$25 below the US$60 target price presented in the December budget update, highlighting the uncontrollable speed at which the price is deteriorating.
Australia’s iron ore miners are facing a potentially lethal problem. As it stands, it is likely that numerous junior miners are already operating at a loss at these depressed price levels and it could be a matter of time before they too follow the likes of Atlas Iron Limited (ASX: AGO) into the ground.
Meanwhile the bigger players, being BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG), are suffering from thinner margins and tighter cash flows. These miners are also one of the key reasons behind the enormous decline in ore prices over the last 18 months, given that they have flooded the market with additional supplies it did not need.
With iron ore prices set to fall even further over the coming months, you can expect further declines in the miners’ cash flows and overall profits. As such, investors would be wise to avoid the miners altogether for now.
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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.
We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.