Iron ore dropped back below the US$50 a tonne mark overnight in what could be the beginning of a sharp slide for Australia's most important commodity.
The commodity has held up surprisingly well in recent months, hovering between the US$50 and US$60 a tonne marks as investors became increasingly confident that it had finally found its floor. Overnight however, it fell 3% to US$49.95, according to data from the Metal Bulletin, with some economists suggesting a fall to US$40 will occur in the coming months.
The slump has been caused by a combination of an economic slowdown in China, resulting in waning demand growth, and a boost in supply from the world's biggest miners, including Australia's own BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO). The opening of Gina Rinehart's Roy Hill project is expected to add even more pressure to the price with millions more tonnes being introduced to the market.
Indeed, this represents a key risk for the iron ore industry as a whole, and particularly those miners that produce the commodity at a higher cost. BHP and Rio Tinto are Australia's two lowest-cost operators, and are likely your safest bet, but even they are susceptible to falling margins and overall earnings. The pair are down 1% and 0.9% today, respectively.
In my opinion, long-term investors would be wise to avoid the sector altogether. Despite the heavy falls experienced over the last 12 months, the miners' share prices could still fall considerably further if conditions worsen, with the risk/reward payoff simply not attractive enough at this point.
