Iron ore rises above US$51 a tonne: Is it time to buy the miners?

The iron ore price continued its remarkable run overnight, climbing above the US$50 a tonne mark for the first time in almost four months.

According to data from The Metal Bulletin, iron ore, which is a key ingredient used for making steel, rose 6.2% during the latest session to trade at US$51.52. It has now risen an incredible 34% since mid-December when it was trading at its lowest price levels in at least six years around the US$38 a tonne mark, while The Australian Financial Review also reported that it’s up roughly 18% year to date.

Is it time to buy?

Investors in the iron ore industry have been burned over the last few years as they watched the commodity fall from around US$185 in 2011, to less than US$40 a tonne late last year. Worse yet, most analysts were forecasting even further falls, suggesting it would soon fall to – or even below – US$30 a tonne.

Indeed, the price rebound has come as a surprise to many analysts. It’s also come as a surprise to investors, many of whom have piled back into the shares of companies such as BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG) in anticipation (or hope) of further gains.

But it’s difficult to see these gains being sustained, and investors who blindly jump back into the sector now could be punished for doing so. After all, there is still a massive oversupply situation in the market, whereby the world’s biggest producers are flooding the market with ore it simply does not need.

At the same time, China’s economy has slowed to its weakest growth rate in a quarter of a century, with expectations it will slow down even more over the coming years. China is the world’s biggest importer, yet it is quickly transitioning away from an economy driven by industrial growth towards one that is driven mostly by services and consumption. That’s a big headwind for the mining industry to contend with.

While it might be tempting to jump back into the miners based on their recent gains, investors need to be cautious. If iron ore prices do suddenly come off the boil, the miners and their shareholders could certainly be the ones to feel the heat.

In particular, I’d avoid the smaller miners, including BC Iron Limited (ASX: BCI) and Arrium Ltd (ASX: ARI). They produce a lower quality ore and maintain higher operating costs than the larger miners, and thus carry greater risks for investors. For what it’s worth however, I’m steering clear of the industry altogether, for now at least.

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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. 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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