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BHP Billiton Limited, Rio Tinto Limited and Fortescue Metals Group Limited: Should you buy?

Credit: South 32

The spot iron ore price has fallen to its lowest level in at least six years overnight as Chinese demand continues to wane.

According to data from the Metal Bulletin, the commodity slipped another 1.7% to just US$42.24 a tonne. It’s the lowest price iron ore has traded at since spot pricing was first introduced in 2009, while the commodity has lost nearly a third of its value since September this year.

The heavy decline has been caused by a pullback in steel production by Chinese firms in response to slowing economic growth, combined with excess supplies from companies like BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO). Both miners had forecast ongoing growth in steel production for many years but are now forcing the commodity’s price lower by oversupplying the market.

Earnings of both miners have come under intense pressure recently, which has been reflected in their crumbling share prices. While both have the capacity to survive the rout, other smaller miners mightn’t be so lucky.

Fortescue Metals Group Limited (ASX: FMG) has also been busy reducing its own production costs in anticipation of lower iron ore prices, but remains a risky bet due to its high debt levels.

Should you buy?

Unfortunately for these miners, prices are expected to continue falling over the coming months and are then forecast to remain low for years. Regardless of whether or not BHP Billiton, Rio Tinto and Fortescue have the capacity to survive the commodities downturn, they’re hardly in a position to thrive, either.

While all three of these companies could become a buy in the future, I don’t think they’re attractive enough to justify the risks facing the industry as a whole just yet.

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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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