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Here’s why I think the low iron ore price is here to stay

Credit: Alrosa

The iron ore price rebounded 1.1% overnight but investors shouldn’t get too excited. In fact, they should probably just get used to these low prices with one analyst suggesting things could stay this way “for many years to come.”

As reported by The Australian Financial Review, Andy Xie, an independent analyst who correctly predicted the commodity’s fall below US$40 a tonne, believes the iron ore industry will become one defined by “low price, stable margin and low growth”.

The AFR quoted another analyst from Morgan Steel as noting that final demand for steel is dropping, indicating that prices may remain below US$40 for some time yet.

Indeed, the iron ore price has been absolutely crushed in recent years, falling from a high north of US$180 a tonne in 2011 to less than US$40 today. It hit an 11-year low of US$38.80 a tonne on Wednesday but regained 1.1% overnight to fetch US$39.08, according to The Metal Bulletin.

That is especially concerning for a number of Australia’s junior iron ore miners which typically maintain higher cost operations and often produce lower grade ore. With prices unlikely to recover anytime soon, that could be very dangerous for businesses like Arrium Ltd (ASX: ARI), Mount Gibson Iron Limited (ASX: MGX) and BC Iron Limited (ASX: BCI).

It’s less threatening to the bigger players, being BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO), which produce ore at a far lower cost than most. They’re still making a profit even at today’s levels but the heavy falls in commodity prices will no doubt impact their revenues and overall earnings. Same goes for Fortescue Metals Group Limited (ASX: FMG).

Although share prices across the sector have fallen sharply, with many trading at multi-year lows (even BHP Billiton’s share price is sitting near a 10-year low), further industry headwinds could certainly push their shares even lower. Considering the risks involved, investors may want to look elsewhere for potentially market-beating returns.

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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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