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Iron ore plunges below US$40 and could fall lower

The iron ore price has officially fallen below US$40 a tonne for the first time in 11 years.

According to data provided by The Metal Bulletin, Australia’s most important commodity export fell to just US$39.40 a tonne on Friday. That’s down more than 30% since September when it traded for nearly US$60 a tonne, while it’s also around 80% below its price levels from 2011 where it traded for north of US$180 a tonne.

That’s clearly bad news for Australia’s miners, especially those which maintain higher cost operations such as BC Iron Limited (ASX: BCI), Mount Gibson Iron Limited (ASX: MGX) and Arrium Limited (ASX: ARI).

It’s also bad news for the majors including BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG).

While the majors certainly have the capacity to weather the commodities storm better than their junior counterparts, they’re still feeling the impact on their earnings and cash flows. In my opinion, that will also be reflected in lower share prices should the commodity continue sliding in price.

Indeed, there are two main reasons why the iron ore price is falling. Firstly, there is a massive global oversupply of the commodity, mostly thanks to BHP, Rio Tinto, Fortescue and Brazil-based Vale. At the same time, global demand is waning, particularly in China as the country transitions away from infrastructure growth to an economy driven by services.

The miners themselves are frantically trying to improve operating efficiencies to drive costs lower and, to be fair, they’re doing a reasonable job of it. Unfortunately, however, there is nothing at all stopping the commodity’s price from sliding even further which could more than offset their efforts.

While there are still strong downside risks facing the sector, investors would be wise to remain on the sidelines for now and focus on other potentially market-beating opportunities 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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