Why these 3 iron ore shares are still risky investments

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The iron ore price inched closer to the US$60 a tonne mark on Friday night, reinforcing hopes that the gains achieved in recent months can be maintained.

Indeed, iron ore is back from the brink after it fell as low as US$38 a tonne in December last year. At the time, most analysts were of the belief the commodity would continue to plunge to new depths but instead, it soared more than 60% to an eight-month high of US$63.75. That even included a remarkable 18.6% single-day gain – the biggest daily gain in the commodity’s history.

Before too long, it was back trading below US$53 a tonne, but it has since rediscovered its composure. In its third consecutive gain, it was up another 2.5% on Friday to fetch US$57.50 a tonne, according to the Metal Bulletin.

It’s worth noting that a number of shares across the iron ore sector have risen strongly in recent months, with investors becoming increasingly excited about the potential for more gains. Fortescue Metals Group Limited (ASX: FMG) has been one of the major beneficiaries, as have BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO).

However, most shares in the sector are actually falling today, despite Friday’s gains, in what could be a sign that some investors are starting to become sceptical of whether, or for how long, the iron ore rebound can last. Fortescue’s shares are down 0.9% while BHP and Rio Tinto are down 0.5% each.

Now, there are no certainties when it comes to predicting commodity prices. That is one of the factors that makes it so risky to invest in the resources sector in the first place, considering most of the miners are heavily reliant on higher commodity prices.

But while commodity prices have risen in recent times, there are signs that suggest the iron ore rebound may only be temporary. To begin with, Chinese steel mills are rumoured to have ramped up their production ahead of a major horticultural exposition between April and October which could force the closure of mills for a time.

Meanwhile, there was also news that Vale could lose up to 100 million tonnes of output over environmental licencing issues, although additional supply from Australia could well erase any impact of that loss of production.

The fact is, the iron ore market still remains heavily oversupplied. Chinese growth will inevitably slow which should apply even more pressure to the demand-side dynamics which many expect will force the iron ore price lower, over time.

Shares of Fortescue, BHP and Rio Tinto could continue to rise if the iron ore price does prove resilient, but there is a big risk that any gains achieved recently could be at least partially erased if prices do fall again. Given their inability to control prices, I’ll be steering clear, 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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