Is the iron ore price set to crash?

Fortescue Metals Group Limited (ASX:FMG) is having a great year, but could iron ore prices be heading to US$45 a tonne to spoil the party?

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In the last week it has been a great time to be invested in iron ore producers such as BHP Billiton Limited (ASX: BHP), Fortescue Metals Group Limited (ASX: FMG), and Rio Tinto Limited (ASX: RIO).

Each of the three mining giants has pushed higher and outperformed the market during this time thanks partly to a rise in iron ore prices for four consecutive sessions.

This run came to an end yesterday when the benchmark 62% fines price fell slightly to finish the day at US$56.77 a tonne according to the Metal Bulletin. Whilst iron ore prices have been holding up nicely for several months, according to analysts at Citi this could all change in the near future.

The Sydney Morning Herald reported today that Citi's analysts are predicting that iron ore prices will remain steady for the next couple of months, but are likely to face significant headwinds thereafter due to an expansion in supply.

Citi is undoubtedly one of the most bearish investment banks on iron ore. It has forecast prices to drop from the US$56.77 a tonne level all the way down to US$45 a tonne in 2017 and then $US38 a tonne in 2018.

I would have to agree with Citi's analysts on this view though. With both Australia and Brazil expected to increase supply greatly over the next few years, it seems inevitable that there will be a growing surplus of iron ore that will drive prices lower. Especially if the insatiable demand from the China market subsides.

So should you sell your shares today? Whilst I wouldn't necessarily suggest that investors need to urgently sell their shares in the miners, I would recommend investors start to look at other areas of the market to invest in. If iron ore prices do fall, I expect it could be a short and sharp move which drags down the miners along with it.

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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