Iron ore rally runs out of puff


The rally is well and truly over.

The spot iron ore price is now down 12% from the high of US$63.30 a tonne reached on March 8, after falling 3.1% to a three-week low on Thursday last week.

Spot iron ore was priced at US$55.50 a tonne according to The Steel Index on Thursday, and fell another 0.5% overnight to US$55.20 a tonne, according to Wall Street Journal data.

Most analysts expect iron ore prices to fall back in the US$40 to US$50 range over the rest of this calendar year, with much of the recent rally attributed to short-term, temporary factors as we outlined last week.

Higher cost producers, particularly smaller miners like BC Iron Limited (ASX: BCI), Arrium Ltd (ASX: ARI), Atlas Iron Limited (ASX: AGO), Gindalbie Metals Ltd (ASX: GBG), Mineral Resources Limited (ASX: MIN), Grange Resources Ltd (ASX: GRR) and Mount Gibson Iron Limited (ASX: MGX) will need to get used to lower prices, and hope the Australian dollar doesn’t surge much higher.

The Australian dollar at 70 US cents was a major bonus for these producers, allowing them to either breakeven or go very close. Further costs cuts – and yes, all these miners are still trying to cut their costs even further – will definitely be on the cards.

That’s not such a big issue for the majors including BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO), Vale and Fortescue Metals Group Limited (ASX: FMG) which are making a profit at current prices – and likely will at even lower commodity prices.

The overriding issue in the iron ore market remains more supply coming into an already oversupplied market and demand falling. Until such time as those two align, iron ore prices are likely to be volatile, with most of the pressure on the downside.

Foolish takeaway

The one shining light is that those leaner, meaner iron ore miners that can survive the downturn in the iron ore price will benefit enormously when the tide turns – as it surely will. The only problem is that no one knows when. It could be this year, or it could be a decade away.

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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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