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Why it’s time for iron ore investors to batten down the hatches


Investors in the iron ore sector ought to batten down the hatches, because the seas are about to get a whole lot rougher.

Iron ore, which is Australia’s most important commodity, fell for the ninth straight session overnight, plummeting a further 5.1% to just US$49.60 per tonne, according to the Metal Bulletin. It’s the first time since April that it’s traded below US$50 while it has now fallen almost 25% since peaking near US$66 a tonne less than a month ago.

That places it in an official bear market, which is defined as a drop of 20% or more.

The latest plunge has come as a result of growing stockpiles of the commodity at Chinese ports, combined with a decline in demand for steel and an increase in global supplies. As the commodity’s price falls, the world’s largest producers continue to ramp up their production rates to reduce their cost per tonnage, resulting in a massive supply and demand imbalance.

Despite the severity of the recent slide, investors should brace themselves for even more pain. Australia’s Department of Industry and Science recently forecast 4% growth in exports in 2015 to 748 million tonnes, and another 10% in 2016 to 824 million tonnes, which threatens to force the commodity’s price even lower than today’s depressed level.

In fact, Capital Economics and Citigroup both believe iron ore will trade for less than US$40 a tonne by the end of the year, which could prove catastrophic for high-cost miners such as Arrium Ltd (ASX: ARI), BC Iron Limited (ASX: BCI), Mount Gibson Iron Limited (ASX: MGX) and even Fortescue Metals Group Limited (ASX: FMG).

BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) aren’t immune, either. Although their low cost operations will allow them to weather the storm better than their high-cost peers, their margins and overall profitability will still be impacted by lower prices, making them a dangerous bet for investors today.

Indeed, successful investing is about stacking the odds in your favour. Rather than taking a risk on any of the miners, you would be much better off investing your hard-earned cash elsewhere.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. You can follow Ryan on Twitter @ASXvalueinvest.

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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