Iron ore falls to lowest level in 6 years: What you need to know

Falling commodity prices are bad news for BHP Billiton Limited (ASX:BHP) and Rio Tinto Limited (ASX:RIO)

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The iron ore price plunged to its lowest level in at least six years overnight as concerns continue to amass regarding rising supplies and sinking global demand.

Prior to last night, the commodity traded for a low of just US$44.59 in July this year, before rebounding strongly to trade near US$60 a tonne. However, the optimism soon wore off as the world’s biggest miners continued to ramp up their supplies at a time where China’s growth was clearly slowing.

The commodity is now on track to record its third consecutive annual retreat after falling another 1.9% overnight to just US$43.89 a tonne, according to the Metal Bulletin. At that price, it’s likely that some of Australia’s iron ore miners are already operating at a loss and, with further falls expected, could be forced to close their mines at some point in the future.

As it stands, miners such as BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) remain somewhat protected due to their low operating costs, but even their earnings are coming under enormous pressure. Fortescue Metals Group Limited (ASX: FMG) has also been frantically cutting costs but remains a risky bet due to its hefty debt load.

Smaller miners such as BC Iron Limited (ASX: BCI) and Mount Gibson Iron Limited (ASX: MGX) are also dangerous bets.

Although there could come a time to buy the miners at some point in the future, I don’t believe it would be the best move today. Indeed, the iron ore rout is expected to continue in 2016 with some analysts suggesting the price will fall south of US$40 a tonne. Colleague Mike King thinks that may even be optimistic and prices could fall even further.

With the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) still trading well below its high from March, I think investors would be better to look elsewhere rather than taking an unnecessarily high level of risk in the mining sector.

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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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