Where to next for the iron ore price?

Credit: South 32

The direction the iron ore price takes has become a hot topic today following comments from the chief executive officer of US-based iron ore producer Cliffs Natural Resources.

In a recent phone interview Lourenco Goncalves has said that bearish forecasts that predict iron ore prices dropping to $US40 or $US30 a tonne have been made by people that “don’t know anything” according to the Australian Financial Review.

Instead Mr Goncalves expects prices between US$50 and US$60 a tonne will be sustained thanks to stable demand from China and lower than forecast levels of new supply. This will undoubtedly be music to the ears of shareholders of BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO), and Fortescue Metals Group Limited (ASX: FMG).

But is he going to be proven right? The bears don’t believe he will be. Investment bank Morgan Stanley has forecast prices to drop back to US$40 a tonne, Citigroup has forecast iron ore prices to average US$45 a tonne next year on the back of gains in supply, and Westpac Banking Corp (ASX: WBC) sees iron ore prices collapsing below US$40 a tonne next year.

BHP Billiton itself recently stated that it expects prices to start to drop as new supply hits the market. The mining giant’s view has thus far proven to be accurate. The benchmark 62% fines prices dropped 2.9% to $56.09 a tonne on Tuesday according to the Metal Bulletin. This left prices at their lowest levels in almost a month.

I believe these opposing views highlight just why an investment in these miners is a reasonably high risk one. If two mining giants cannot agree on the direction of commodity prices, then how anyone can expect to successfully forecast prices is beyond me.

If iron ore prices were to be sustained then I would be interested in Fortescue Metals. The work that management has done to pay down debt and lower costs has been phenomenal. But due to the unpredictability of prices I believe investors would be better served by focusing on other areas of the market today.

Instead of BHP or Fortescue I believe investors will get better returns with investments in these three fantastic ASX shares.

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Motley Fool contributor James Mickleboro 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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