Iron ore price surges 8.8%: Here’s why it could be too late to buy the miners

The iron ore price continued to charge higher overnight, soaring above US$70 a tonne for the first time in more than 12 months.

According to figures from The Metal Bulletin, the metal rose a staggering 8.8% during the session to close at US$70.46 a tonne, giving it a gain of more than 20% since the beginning of the week. It has also rebounded nearly 84% since mid-December when it bottomed out at a little over US$38 a tonne.

Last night’s gain has mostly been attributed to a ramp up in production by Chinese steelmakers who are taking advantage of greater profit margins.

Despite the sharp gain, shares across the sector have actually fallen today. BHP Billiton Limited (ASX: BHP) shares are down 2.2%, partially due to a retreat in oil prices, while Fortescue Metals Group limited (ASX: FMG) and Rio Tinto Limited (ASX: RIO) are down 2.6% and 1.4%, respectively.

This response may be due to investors recognising that the spike was caused, at least in part, by an opportunistic response to higher margins by Chinese mills, combined with heightened concerns that these higher iron ore prices cannot be sustained.

Indeed, executives from both Rio Tinto and BHP have expressed their opinions that these prices will only last a few months at most, while a number of analysts also expect the commodity’s price to retreat in the second half of the year.

Although you may be tempted to buy into the sector now, investors should remember that shares in the resources sector typically follow the price movements of the commodities themselves. If iron ore or oil prices do retreat, that could prove very damaging for anyone exposed.

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Motley Fool contributor Ryan Newman 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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