Hold onto your hats, Fools, because this wild ride is only just getting started.
Panic is likely to set into the markets today in a big way following a brutal fall in the price of iron ore overnight. According to figures provided by the Metal Bulletin Ltd, the steel-making commodity fell for its 10th consecutive session, plunging 10.1% to a new low price of US$44.59 per tonne. That’s down more than 30% over the last month, putting it well and truly in an official bear market.
Of course, the commodity has come under enormous pressure over the last 18 months as a result of a deadly cocktail of waning Chinese demand and a tidal wave of fresh supplies from the world’s largest miners. But there’s even more to the recent plunge than simple supply and demand economics.
Rising stockpiles at Chinese ports as an aside, the latest sell-off has coincided with a free-falling Chinese sharemarket. The Chinese government has thus far been unsuccessful in stemming its local sharemarket’s tailspin with the Fairfax press reporting that more than 40% of listed companies in Shanghai and Shenzhen had been forced into a trading halt to limit any further slides.
Unfortunately, there is no way of knowing what will happen next, or the impact it could have on the global economy. It is particularly relevant to local investors given that China is our biggest trade partner and accounts for roughly two thirds of the global seaborne iron ore.
That is, if the damage spills into China’s real economy, then what effect would that have on demand for Australian goods and services?
That’s why today, and the foreseeable future, is likely to be brutal for Australia’s iron ore miners. Although they have all desperately tried to lower their costs, it is unlikely that their efforts will be enough to see them remain profitable at today’s prices, let alone if iron ore falls any further.
To be clear, BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) will still make a profit, albeit on thinner margins, but other miners such as BC Iron Limited (ASX: BCI), Arrium Ltd (ASX: ARI) and Mount Gibson Iron Limited (ASX: MGX) will come under intense pressure. Fortescue Metals Group Limited (ASX: FMG) isn’t safe either, given the mountain of debt it must repay over the coming years.
Given the severity of the overnight fall, trading today is likely to be choppy – particularly in the iron ore sector. While I believe investors should limit their exposure to the sector as best possible, it is also important to maintain your cool and not panic, because that’s when irrational decisions get made and capital losses realised.
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