Iron ore is down 23% since April peak and more falls are coming

Credit: iStock

The iron ore price continues to tumble, losing another 0.9% on Friday, to close at US$54.54 a tonne, according to Metal Bulletin.

Since peaking at US$70.46 on April 21, the commodity price has now dropped 23%, putting it firmly in bear-market territory.

The main culprit recently has been weak Chinese economic data, which adds to a market already struggling with oversupply, and pricing which may have been forced up by speculative trading in iron ore and steel futures by Chinese retail investors.

Production and oversupply

The oversupply issue is also expected to get worse, with Rio Tinto Limited (ASX: RIO) boss Sam Walsh recently telling shareholders that more supply is coming on – from players including Brazil’s Vale – while Gina Rinehart’s Roy Hill mine is ramping up from nothing to producing 55 million tonnes annually.

Rio reported a 13% increase in first quarter production and Fortescue Metals Group Limited (ASX: FMG) recently reported that it could beat its own forecast, after quarterly ore shipped rose 4% compared to a year ago. The world’s fourth-largest iron ore miner is currently producing at a rate of 165 million tonnes annually, and depending on the weather, could hit 168 million tonnes or more by the end of June 2016.

Futures speculation

When it comes to pricing, Chinese authorities have taken steps to limit speculation in futures trading on a number of its exchanges, which has seen volumes fall off a cliff, and prices moderate.

But more falls could be ahead as more retail investors drop out of the market.

Economic data

On the demand side of the equation, Chinese economic data continues to disappoint. Last week it was April’s imports and exports that missed analyst’s expectations. Exports fell 1.8% compared to a year ago and imports were down 10.9% in US dollar terms – their 18th consecutive month of declines.

Over the weekend, retail sales missed the forecast by economists, urban fixed asset investment rose by 10.5% – below the 10.7% seen in March, and industrial output grew by 6%, below expectations for an increase of 6.5%.

Foolish takeaway

All the signs point to further falls in iron ore prices – not great news for iron ore miners.

Forget the miners. This "dirt cheap" company. is growing like gangbusters, and trading on a 5.6% dividend yield, FULLY FRANKED (8% gross). With interest rates set to stay at these low levels for years to come, for income-hungry investors, including SMSFs, this ASX company could be the "Holy Grail" of dividend plays for 2016.

Click here to gain access to this comprehensive FREE investment report, including the name of this fast growing ASX dividend share. No credit card required.

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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.