Iron ore jumps above US$65 a tonne: Is it time to buy?

Fortescue Metals Group Limited (ASX:FMG), BC Iron Limited (ASX:BCI), Rio Tinto Limited (ASX:RIO) and BHP Billiton Limited (ASX:BHP) are all rising strongly today.

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Australia’s iron ore miners are skyrocketing today after the commodity, which is a key ingredient used to make steel, rose 1.7% to US$65.39 a tonne, according to the Metal Bulletin. The commodity has now surged more than 40% since hitting a 10-year low of US$46.70 a tonne back in April.

Now trading at its highest price since February, it is believed that a drop in Chinese stockpiles of iron ore has sparked the recent rally which has now extended to seven straight sessions. Low stockpiles at Chinese ports could reflect firming demand from Chinese mills, sparking concerns about a potential shortage of the raw material in the near-term and hence forcing its price higher.

High-cost miners such as Fortescue Metals Group Limited (ASX: FMG) and BC Iron Limited (ASX: BCI) are amongst the biggest beneficiaries today, having surged 4.7% and 8.5% as a result. Arrium Ltd (ASX: ARI) is also up 4.5% while the majors, BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO), have jumped 2.1% and 2.4% respectively.

With the exception of BHP Billiton (due to its spin-off of South32 Ltd (ASX: S32)), most of Australia’s iron ore miners have surged higher since late April which coincides with the gains enjoyed by the commodity itself.

Should you buy the miners?

Before investors get too comfortable with the recent rally and the jumping share prices within the sector, analysts are cautioning that they expect the commodity to resume its rapid descent in the not-too-distant future. As an example, Fitch Ratings has just downgraded its outlook for both Rio Tinto and BHP Billiton from ‘stable’ to ‘negative’ on expectations of a weaker iron ore price moving forward.

Indeed, while the short-term factors may have changed, the long-term fundamentals remain the same in that supply will heavily outweigh demand moving forward.

As it stands, Rio Tinto, BHP and Brazil’s Vale are all committed to their long-term expansion plans, as are some of the world’s smaller miners who are desperate to lower their average cost per tonne. At the same time, Chinese demand will inevitably slow with recent data having showed a massive 8.5% dip in imports in May from a year earlier.

As tempting as it may seem to jump into the sector in the hope of further gains, investors would be far better off exploring some of the market’s more compelling opportunities – especially given the heavy falls experienced by the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) in recent months.

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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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