Resources stocks crash: why the worst might be yet to come

Credit: South 32

The iron ore price is now sitting dangerously close to setting a new low after falling more than 4.5% overnight to US$45.58 a tonne, according to data from the Metal Bulletin.

It’s the lowest price since early July, while it is just 2.2% away from breaching its low of US$44.59 dating back to 2009.

Indeed, iron ore prices are under enormous pressure due to oversupply within the market. The world’s biggest producers, including Rio Tinto Limited (ASX: RIO), BHP Billiton Limited (ASX: BHP), Fortescue Metals Group Limited (ASX: FMG) and Brazil’s Vale, have all ramped up their supply levels at a time where demand growth from China is actually falling.

With production from Gina Rinehart’s Roy Hill project to come online in the near future, prices will likely fall even further. In fact, some experts are even suggesting the commodity could fall below the US$40 a tonne mark before the end of the year despite trading near US$60 a tonne as recently as September.

Even BHP’s own vice president of iron ore marketing, Alan Chirgwin, believes prices will decline for years to come, according to The Australian Financial Review, highlighting the severity of the headwinds facing the industry.

Rio Tinto, BHP Billiton and Fortescue Metals Group have all been hit hard today as a result of the fall, shedding 2.2%, 2.6% and 2.9% respectively. However, they’re not the only ones feeling the pain with various other commodities, including copper, also crumbling in price overnight.

The Brent oil price fell 1.9%, dragging Woodside Petroleum Limited (ASX: WPL) and Origin Energy Ltd (ASX: ORG) 1.1% lower each, while a 1% fall in the price of gold saw the miners plummet.

Newcrest Mining Limited (ASX: NCM), the country’s biggest gold producer, fell 4.2%, while Northern Star Resources Ltd (ASX: NST), EVOLUTION FPO (ASX: EVN) and Silver Lake Resources Limited.  (ASX: SLR) fell between 5.1% and 9.8% each.

Although many stocks across the resources sector are hovering at or near 52-week lows, there’s nothing stopping them from falling even further. If commodity prices do continue to crash, earnings growth will become increasingly difficult to achieve making it a very risky sector to be exposed to right now.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. 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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