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Iron ore price rockets up 6%: Excellent news for miners

The spot iron ore price went nuts overnight, rising 6.4% to US$53.86 a tonne, the highest price since May 20, in what should be great news for miners.

The average price so far this year is now around US$51.89 a tonne, and appears to have stabilised at these levels – bar the occasional jump or dive.

iron ore price June 2016

Source: MetalBulletin

Further rises tonight could also be on the cards, with Chinese iron ore futures surging another 3.7% overnight. The spot price tends to follow the futures pricing.

That should be a welcome relief to Australia’s junior miners – many of whom were struggling to make a profit at lower prices. It should also see many post a strong start to the day’s trading, including the likes of BC Iron Limited (ASX: BCI), Atlas Iron Limited (ASX: AGO), Gindalbie Metals Ltd (ASX: GBG), Grange Resources Limited (ASX: GRR) and Mineral Resources Limited (ASX: MIN).

It also means stronger cash flows for the majors Rio Tinto Limited (ASX: RIO), BHP Billiton Limited (ASX: BHP) and Fortescue Metals Group Limited (ASX: FMG).

There are still some big threats hanging over the iron ore price, including increasing low-cost supply coming online from the likes of Brazil’s Vale and Gina Rinehart’s Roy Hill Mine. And while BHP, RIO and Fortescue appear content to continue producing at current levels, that doesn’t necessarily mean that will remain the case.

There’s also the risk of China cutting its steel production – with reports that the government was aiming to slash 45 million tonnes of Chinese steel capacity this year – and follows on from the February announcement of cutting 100-150 million tonnes of steel capacity by 2020. Many Chinese steelmakers are running at a loss, and two of the largest producers are planning to restructure their operations according to Reuters.

Foolish takeaway

The short term news might be good, but the longer-term outlook appears clouded with risks coming from both the supply and demand sides. Buyers of junior iron ore miner’s shares beware.

 

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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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