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Iron ore surges 5.9%: Here’s what every investor needs to know

Iron ore experienced its strongest surge in price in more than two years overnight after BHP Billiton Limited (ASX: BHP) said it would defer expansion of its Pilbara iron ore operations, relieving pressure on the commodity.

According to data provided by the Metal Bulletin Ltd, iron ore rallied US$3 or 5.9% to be trading at US$54.04 a tonne, its strongest single-day rise since October 2012, as reported by the Fairfax press. That represents a rise of nearly 16% since the commodity hit a decade low of US$46.70 a tonne earlier in the month.

What happened?

Since it traded at around US$135 a tonne in January 2014, the commodity has fallen heavily as a result of an imbalance between supply and demand. While Chinese demand has slowed considerably, the world’s largest miners have all been locked in a race to reduce costs and increase production rates, flooding the market with unnecessary supplies.

While BHP Billiton has played a key role in the world’s supply increase, the miner said yesterday in its third-quarter production report that it would defer its Inner Harbour Debottlenecking project in response to crashing prices. Deferral of the project will ensure the miner will not hit its target production rate of 290 million tonnes per annum (Mta) by mid-2017. BHP said “This will lead to a slower path to system capacity of 290 Mta, (but) it will come at a lower capital cost.”

BHP Billiton’s decision will come as an enormous relief for the nation’s iron ore miners who have been desperate for some reprieve as the commodity has plummeted in price recently. Atlas Iron Limited (ASX: AGO) has already suspended operations and many investors believed it mightn’t have been long before rivals such as Mount Gibson Iron Limited (ASX: MGX) or BCI Iron Limited (ASX: BCI) did the same.

Today, those two companies have surged 27% and 5.6% respectively. Meanwhile, BHP Billiton, Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG) have also risen 2.4%, 2.2% and 8.1% respectively.

What happens now?

The overnight climb will no doubt also provide a sense of hope for investors who are eager to gain exposure to the sector in time for a major rebound. However, while such a rebound would no doubt generate enormous returns, it is still unlikely to eventuate in the long term.

The fact remains that the market is still heavily oversupplied which will almost certainly lead to further volatility in prices, making the iron ore sector a dangerous field for investors to venture into. Long-term, Foolish investors would still be much better off focusing their attention on other, safer investment opportunities instead.

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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.

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