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Iron ore surges 10%: What it means for investors

Credit: ginger_ninja

Iron ore posted a huge rebound overnight, rising 9.9% to US$48.99 a tonne following Wednesday’s brutal 10.1% nosedive, according to data provided by the Metal Bulletin.

The commodity’s sharp rebound came after 10 straight sessions in the red which can largely be attributed to China’s crashing sharemarket, which regained some composure in its latest session.

The market has posted enormous losses over the last month or so with the Chinese government unable to regain control of the situation, despite their best efforts, with fears the effects could spill over into the real economy. Iron ore hit a new low of just US$44.59 a tonne yesterday, which represents a 32% decline over the last month.

Indeed, last night’s surge will also come as a huge relief for the iron ore industry and in particular the junior miners. Companies such as BC Iron Limited (ASX: BCI), Arrium Ltd (ASX: ARI) and Mount Gibson Iron Limited (ASX: MGX) maintain higher-cost operations and could struggle to turn a profit in this low price environment.

It will also come as a respite for the Australian and Western Australian governments which rely on a higher iron ore price for their revenues and budgetary forecasts.

Danger! Do not approach

A sudden surge like the one experienced overnight can provide immediate relief to an industry, but it can also create a false sense of security for investors.

As is too often the case, some investors focus on overnight movements in the commodities market and try to time the market as a result. That is, they recognise a strong jump in price and pile their funds into the sector, hoping to catch the lift in time to make a quick profit.

While those investors might get lucky from time to time, timing the market can be an extremely dangerous investment strategy – especially in an industry where companies are so reliant on forces outside of their control to go their way.

Although it is impossible to predict with any accuracy where iron ore will trade tomorrow, next week or even next year, there are strong signs that suggest it will fall in the long run, potentially wiping out a number of Australia’s mining corporations in the process. Indeed, Chinese demand continues to wane, while supplies increase which could see the price fall below US$40 a tonne by the year’s end.

Personally, I wouldn’t even be willing to take a risk on the bigger players, being BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and especially Fortescue Metals Group Limited (ASX: FMG), which are also susceptible to future price falls.

Successful investing is about stacking the odds in your favour as best as possible, and that is not achievable in the iron ore industry right now.

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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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