Top broker suggests iron ore miners will fall in second half

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As many readers will know by now, the price of iron ore has remained stubbornly above US$50 per tonne since the beginning of March, despite a number of reported headwinds. That’s been great for the price of businesses like Fortescue Metals Group Limited (ASX: FMG), BHP Billiton Limited (ASX: BHP), and Rio Tinto Limited (ASX: RIO), which have risen 100%, 28%, and 22% respectively in the past three months.

However, the Cinderella story could be about to come to an end, according to analysts from Citigroup. Fairfax media this morning reported that Citigroup analysts were expecting iron ore prices to reverse on continued oversupply in the second half of this year. Citigroup has forecast an average of US$45 per tonne for 2016, and prices of US$39 in 2017 and US$38 in 2018.

Fortescue, BHP, and Rio are all comfortably profitable at today’s prices, although margins, cash flows and potentially dividends could come under pressure again if prices retreat. While specific prices are very difficult, if not impossible to predict precisely, the general direction of forecast prices (down) may be worth keeping in mind for investors.

Certainly I haven’t seen any in the market predicting sustained price rises, which could suggest that most of the major miners have more downside risk than upside potential at today’s prices. Like most commodities, iron ore prices are a function of supply and demand, and the market looks set to be oversupplied for some time yet. One saving grace is that Chinese steel production is still at record highs, hitting 70.6 million tonnes in March, as reported by Fairfax. Should steel production or demand start to unwind, the iron ore price could sink like a stone.

Ordinary investors might be stacking the deck against themselves by trying to make money in an industry in the grips of a downturn as sustained as this one.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. 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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