Iron ore surged another 1.4% to US$59.01 a tonne overnight, according to The Metal Bulletin, with the commodity now fetching its highest price in 10 weeks following a four-day rally.
Since hitting a low of US$44.59 a tonne in July this year, iron ore has steadily risen higher despite a surge in supply from the world's biggest producers.
The most recent rally, which has seen the commodity climb to its highest level since 1 July, is believed to have been sparked by falling stockpiles at Chinese ports, which has led to restocking of low inventories.
Some of Australia's biggest miners are benefiting from the news today with BHP Billiton Limited (ASX: BHP) up 0.3%, while Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG) are up 2.2% and 1% respectively.
Before investors get too excited however, there are a number of factors to consider which suggest the recent optimism won't last. To begin with, Chinese steel sales are traditionally strong during September and October, meaning that steel mills need to increase production.
As this production cools down, so too could demand for iron which could see the commodity's price sink once again. Investors also need to consider the fact that while the world's biggest producers are increasing their output, China's economic growth is slowing down considerably. BHP Billiton recently revised its forecast for when steel production would hit its peak, and at what quantity, highlighting that its previous forecasts were overly ambitious.
Although the miners themselves are trading at historically low prices which may prove tempting for investors, any eighth-grade economics student could tell you that a fall in demand, combined with a rise in supply, will have a negative impact on prices. That's bad news in the long run for our miners, and for investors who have their cash tied up in them.
Considering the risks associated with the miners today, it seems investors would be better off looking at some of the market's potentially more rewarding opportunities instead.
