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The iron ore price was smacked again overnight

mine blast explosives
Credit: iStock

So much for predictions that commodity prices have bottomed.

Iron ore continued its downward decent overnight, losing 5.2% to US$60.09 a tonne, following a 4.3% fall the previous day, the biggest two-day fall since July 2015, and the trend is likely to continue.

While demand is not the real problem, oversupply of the commodity and additional supply coming into the market should act to force the price down.

While demand in China is ok, the current problem is the overproduction of steel, but that is likely to come off in the second-half of 2016 thanks to a number of factors, including Chinese authorities clamping down on rampant speculation in the iron ore futures market, moves to cut pollution by closing steel mills in one major Chinese city over the next few months for a number of days, and Western countries imposing tariffs on cheap Chinese steel to protect their own industries.

After briefly poking its head above US$70 a tonne in April, the iron ore price has been extremely volatile, rising more than 8% over two days, before sliding 9.5% in the past two trading days.

A number of forecasters are predicting prices of around US$50 to US$55 a tonne for 2016, but it could easily fall into the US$40 to US$50 a tonne range or below.

In early trading today, just Mount Gibson Iron Limited (ASX: MGX), Atlas Iron Limited (ASX: AGO) and BHP Billiton Limited (ASX: BHP) are in the red, with their share prices falling 4.8%, 4.6% and 0.6% respectively.

BC Iron Limited (ASX: BCI) share price is flat at 16.5 cents, while Fortescue Metals Group Limited (ASX: FMG) is up 0.2%, Rio Tinto Limited (ASX: RIO) share price is up 0.6% at $48.12 and Mineral Resources Limited (ASX: MIN) is up 1.4%.

Australian miners also face two other headwinds in the form of the strong Australian dollar – at US 74.6 cents (although it has fallen ~3 cents since Tuesday) – and rising oil prices.

Foolish takeaway

Investing in the iron ore miners now might be a mistake, particularly if iron ore prices continue to tumble.

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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

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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