Here’s why there could be more pain for iron ore investors

Credit: South 32

After falling to its lowest price in at least six years, investors enjoyed a brief rally in the iron ore price late last year but that rally appears to have reached an abrupt end.

The commodity traded for around US$44.37 per tonne on Tuesday last week, according to data from The Metal Bulletin, but has since fallen almost 11% to just US$39.51 a tonne. It’s not as low as it has traded at in recent months, but some analysts don’t think it will be long before it begins to test those levels again.

Indeed, The Australian Financial Review highlighted yesterday that analysts from the ANZ Bank think the commodity could extend its rout, falling beneath its low of US$38.30. As quoted by the AFR, those analysts said “we expect prices to remain weak throughout Q1 2016, ranging between $US35-$40/tonne. However, the probability of prices breaking below this range in the short term is rising daily” (emphasis added).

They’re not alone in those predictions. Analysts from Goldman Sachs have also forecast a price of just US$35 a tonne for 2017 and 2018, suggesting the commodity could shed another 10% or more from its current value.

Although most miners in the sector have been desperately trying to cut costs, with some even closing mines they deemed to be economically unviable at these prices, prices at that level could force even more from the market.

Those most at risk are the junior miners, many of which also produce lower quality ore, which could include Mount Gibson Iron Limited (ASX: MGX), Arrium Ltd (ASX: ARI) and BC Iron Limited (ASX: BCI). Other analysts have suggested that falling iron ore prices could even take a big scalp if conditions continue to deteriorate.

The miners least at risk are BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO), mainly due to their mass scale and low cost operations and, in BHP’s case, its diversity as well. However, their earnings have already taken a big hit as a result of falling commodity prices and the 2016 financial year should be much the same.

Their share prices have been hammered as a result of these expectations, but there’s every chance they could fall even further from here.

Considering the risks facing the industry, investors might be wise to avoid the miners for now to focus their attention elsewhere. With the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) sitting near its lowest level in two-and-a-half-years, there are plenty of other great companies trading at cheap prices which deserve your attention first.

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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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