Since rising above US$65 a tonne recently, the iron ore price has been stuck in a gradual decline with the commodity falling another 2.2% overnight to US$61.51 a tonne and adding to the 2.1% drop experienced on Tuesday, according to data provided by the Metal Bulletin.
Iron ore is a commodity that is predominantly used as a steelmaking ingredient and hence, experiences strong demand during times of economic expansion. As you might have guessed, China is currently the largest consumer of iron ore, accounting for roughly two-thirds of the world's seaborn iron ore.
The problem is demand from China is slowing at a rapid pace and is now expected to peak far earlier than what most miners had previously anticipated. As highlighted by Reuters, Goldman Sachs expects demand for the commodity to peak in 2016 (others believe it will occur at some point this year), which is nearly a decade earlier than prescribed by the world's largest miners to justify their expansion plans.
BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Brazil's Vale are all responsible for the tidal wave of fresh supplies hitting the global market at a time where it simply is not needed. The world's fourth largest producer, Fortescue Metals Group Limited (ASX: FMG), is also guilty of that despite the fact it is leading the chorus of naysayers against the actions of its larger peers.
Investors who are not yet ready to admit that the mining boom is over would point to the current iron ore price, and note that it remains more than 30% higher than its 10-year low of US$46.70 recorded earlier this year. Indeed, the world's high-cost producers are breathing a sigh of relief right now, but that respite mightn't last for too long.
While the market is clearly revelling based on signs that the world's largest miners may put the breaks on their expansion plans, other higher-cost miners will simply take their place in increasing their own supplies, taking advantage of the higher commodity price. Until those higher-cost producers are forced from the market altogether, and until demand for the commodity increases again, iron ore prices are almost certain to weaken over the coming years.
Given that the miners themselves rely on higher prices to generate profit growth, investors would be wise to recognise the enormous risks involved with investing in the sector and elect to invest their hard-earned money in safer, more promising opportunities.
