The iron ore rally has been far stronger than most investors could have possibly imagined, but some analysts are suggesting the market shouldn’t get too comfortable.
Overnight, the iron ore price extended its incredible rally, jumping another 2.6% to US$63.02 a tonne, according to the Metal Bulletin. That’s a remarkable 35% gain from its 10-year low of US$46.70 just over a month ago.
Indeed, stocks within the sector have rallied hard over the last month as investors have become increasingly confident, but experts are seriously doubting its sustainability. Analysts at ANZ Bank and UBS, for instance, have both slashed their near-term forecasts based on the fact that global supply continues to expand, while Goldman Sachs has now chimed in stating that the latest rally is a great opportunity for investors to short the commodity, as reported by the Fairfax press.
The fact is, although BHP Billiton Limited (ASX: BHP) and the Brazilian-based Vale have both indicated they could limit their supply growth in the next few years, supply will continue to heavily outweigh global demand growth. Notably, while many analysts have revised their near-term forecasts for the commodity, most remain bearish on the commodity for the long term.
While investors might be tempted to gain exposure to the sector to profit from the recent rebound, they need to keep the big picture in mind. That is, the long-term trend suggests iron ore will continue to plummet, as can be seen in the chart below (unfortunately, BHP Billiton’s and Vale’s announcements are highly unlikely to alter the long-term trend).
Should the iron ore price take another sudden dive (which is entirely possible), investors within the sector could be hit hard. That is especially the case for the nation’s higher cost producers, including Fortescue Metals Group Limited (ASX: FMG), BC Iron Limited (ASX: BCI) and Mount Gibson Iron Limited (ASX: MGX).
With the long term in mind, ‘Foolish’ investors would be wise to avoid the sector altogether and focus their attention on more promising trends.
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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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