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Iron ore price plunge: Will the miners follow?

Credit: iStock

The shares of iron ore mining giants BHP Billiton Limited (ASX: BHP), Fortescue Metals Group Limited (ASX: FMG), and Rio Tinto Limited (ASX: RIO) will be on watch today after the iron ore price tumbled 6.5% to $US72.68 a metric tonne overnight, according to the Metal Bulletin.

On Friday iron ore finished the week at US$79.81 a tonne, having risen an incredible 22% in November alone. But since then the metal has fallen almost 9% as the market gets realistic on demand.

Following Donald Trump’s victory at the U.S. election, the iron ore price rocketed as traders speculated that the President-elect’s infrastructure plans would cause demand to surge.

This was great news for miners and especially Atlas Iron Limited (ASX: AGO) and BC Iron Limited (ASX: BCI). In the last five trading sessions these two junior miners have seen their shares jump by 85% and 52%, respectively.

But as we pointed out recently, the rally appears to be unsustainable. Reports in the Fairfax Media reveal that analysts from both UBS and Morgan Stanley believe that producers have a lack of confidence in current iron ore price levels and expect them to fall.

Their view has been based on the fact that current sky-high iron ore prices have not been enough to incentivise many producers to restart production.

If the producers aren’t bullish on iron ore, then I’m certainly not going to be. I still believe iron ore prices are set for a steep drop in the next few months as more supply from Australia and Brazil hits the market.

In fact, I wouldn’t be surprised to see the price drop down to US$50 a tonne by the middle of next year.

Whilst many of Australia’s low-cost miners such as Fortescue Metals will still remain extremely profitable at US$50 a tonne, the bumper profit growth that has been baked into the current share prices may not eventuate.

In light of this I feel that now might be a great time to move out of iron ore and into other areas of the market.

Instead of risking your hard earned money in iron ore I would suggest investors look at these rapidly growing shares. Each has strong growth prospects and pays a fully franked dividend.

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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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