The price of iron ore staged a recovery overnight, rising 2.2% to US$61.34 a tonne, according to the Metal Bulletin, after falling by 2.2% during the previous session.
The iron ore industry has come under enormous pressure in recent years as falling demand for the steelmaking ingredient has coincided with a rapid increase in supplies from the world's largest producers. After trading at US$135 a tonne as at the beginning of 2014, the commodity plunged to a 10-year low of just US$46.70 a tonne earlier this year – a decline of more than 65% in roughly 16 months.
More recently, the commodity has managed to recover some of its value on diminishing stockpiles in China, together with indications that two of the world's largest producers, namely BHP Billiton Limited (ASX: BHP) and Vale, may look to pump the brakes on their expansion plans. It briefly rose above the US$65 a tonne mark, lending some much-needed support to Australia's embattled mining sector.
Is the market right to ignore the miners?
While iron ore bulls would like to think that the commodity's price will remain around these levels; others are (justifiably) much more sceptical. To begin with, once China has finished restocking its inventories, demand will continue to fall and any slowdown in production from BHP and Vale would only be met with an increase in supplies from other miners, including Rio Tinto Limited (ASX: RIO), looking to take advantage of the higher price environment.
Indeed, Goldman Sachs has joined the chorus of financial firms who remain bearish on the commodity's outlook, declaring that iron ore will average just US$49 a tonne in the third quarter and US$48 in the final three months, as highlighted by the Fairfax press. Prior to that, ANZ, the Australian government and UBS had all predicted lower prices in the coming years, with UBS also predicting that iron ore would revisit its lows by the end of the year.
It could be argued that companies such as BHP, Rio Tinto and even Fortescue Metals Group Limited (ASX: FMG) are attractive investment prospects based on an iron ore price north of US$60 a tonne. While BHP and Rio Tinto maintain break-even prices considerably below that level, Fortescue could also be making a reasonable profit with the potential of cutting costs even further.
Before investors act on that assumption however, they need to remember the likelihood that the commodity's price will fall considerably from that level in the future. After all, we are investing for future earnings growth, and must constantly assess the long-term outlook and trends that could impact our investments.
In this case, I'd be willing to wager that the bears are right in saying iron ore prices will fall considerably further than today's price tag. As such, investors should continue to avoid the iron ore miners in favour of some of the market's safer, and potentially much more rewarding opportunities.
