Can the iron ore bounce save the junior miners?

Iron ore prices have surged more than 15% to US$45.73 a tonne, from mid-January lows of US$39.51 a tonne, and is the best-performing commodity in 2016 in US dollar terms this year.

According to Macquarie Group, iron ore beat 67 other commodities and financial assets, and the broker  noted, “sub-US$40 per tonne iron ore was under whiplash conditions and was unlikely to be maintained owing to normal seasonality if nothing else.

But the rally has done little to help the share prices of Australia’s junior iron ore miners. Atlas Iron Limited (ASX: AGO) share price is down 33% year to date, the BC Iron Limited (ASX: BCI) share price has dropped 26% while Arrium Limited (ASX: ARI) and Mount Gibson Iron Limited (ASX: MGX) have seen their share prices decline by 2% and 3% respectively. Maybe the market has seen the writing on the wall already…

Macquarie thinks the metal is unlikely to return to sub-US$40 a tonne prices, but others disagree. ANZ senior commodities analyst Daniel Hynes has told Fairfax Media that the recent price surges were due to temporary supply disruptions and were short-lived. He says he expects prices would soon reverse, with demand conditions weak, while supply growth is expected to resume outside the temporary disruptions.

I agree with ANZ. The iron ore price is more than likely headed lower, once the Chinese New Year is over (after this week) and normal trading resumes. The iron ore market is massively oversupplied, with even more supply still coming on stream – as I’ve mentioned previously.

China’s steel production is falling, demand for steel is slowing and both trends are likely to continue into the future. That means even lower demand for iron ore – at the same time as additional supply comes onto the market.

Australia’s junior miners have done a sterling job of cutting their costs back significantly – but gains from here on are likely to be very small incremental improvements – and probably not enough to ensure they remain profitable.

Foolish takeaway

It may look like the worst has passed over the iron ore industry and better times are ahead – but that couldn’t be further from the truth. Iron ore prices are set to slide again.

Look out below.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. 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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