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Iron ore price to fall below US$40 in bad news for mining shares

Oil prices recovered from Wednesday’s sharp downturn overnight, but iron ore wasn’t so lucky.

Instead, the commodity slipped another 0.9% to just US$40.75 a tonne, according to The Metal Bulletin. It’s lost 8.4% this week alone, putting iron ore firmly in another official bear market.

Indeed, analysts have been bearish on the commodity for some time with many forecasting a drop into the US$30s range. What is perhaps surprising however is the speed at which it could ultimately hit that range: iron ore was trading for nearly US$60 a tonne as recently as September 2015, representing a drop of nearly 33% since that time.

As Australia heads into summer, China is leading into the winter months which could well lead to a further fall in demand. Chinese growth has already been slowing down considerably with steel output diminishing while at the same time, the world’s biggest producers have expanded their output, forcing prices lower.

At this price, it’s likely that some of the world’s higher cost miners are already operating at a loss. Local companies such as BC Iron Limited (ASX: BCI) and Mount Gibson Iron Limited (ASX: MGX) are particularly risky and could be in real trouble should the iron ore price fall any lower.

Some investors have gone so far as to suggest falling prices are actually a good thing for the larger miners as they could be left with greater market share if the smaller miners do fold. Personally, I don’t see that being the case – particularly in the near term.

Indeed, miners such as BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: BHP) are already suffering compressed earnings and cash flows while their dividend yields are also in danger, as are their shareholders. Their share prices have already been slammed over the last 12 months and could fall even further should the iron ore price continue to weaken.

Although share prices across the sector are already trading at multi-year lows, there are still strong headwinds facing the global mining industry which could drag shares even lower. Personally, I’m not a buyer at these prices and think there are plenty of other great opportunities to take advantage of instead.

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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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