Has the iron ore price bubble burst?

Credit: Lucas Walters

The incredible iron ore rally came to a sudden halt overnight as prices fell 4.4% to US$77.30 a tonne according to the Metal Bulletin.

At the start of the week iron ore looked unstoppable. Climbing above US$80 a tonne for the first time in over two years. Overall, the iron ore price had gained over 26% in November alone.

These gains came as a result of Chinese steel prices hitting 30-month highs after Chinese officials announced the cut of 88 million tonnes of steel capacity this year. As I explained on Monday, this should be good news for steel prices but not for iron ore prices.

The reduction in steel output means lower demand for steelmaking ingredient iron ore at a time when increasing supply is expected to hit the market.

Chinese speculators were largely believed to be driving the iron ore price artificially higher and this appears to have been the case.

On Tuesday both the Shanghai Futures Exchange and Dalian Commodities Exchange attempted to curb speculative trading by limiting position sizes and increasing margin requirements according to Reuters.

So far this appears to have worked and the iron ore bubble could have just burst. This would be bad news for shareholders of BHP Billiton Limited (ASX: BHP), Fortescue Metals Group Limited (ASX: FMG), Rio Tinto Limited (ASX: RIO), and Atlas Iron Limited (ASX: AGO), which have all rallied strongly in November.

All eyes will be on Chinese trading today to see if this was a blip on the way to US$90 a tonne or the first part of a major correction. Whilst I expect it to be the latter of the two, the iron ore price has a habit of surprising the market.

All in all, I wouldn’t recommend investors buy the iron ore miners at this point. Their shares could come under heavy selling pressure if iron ore prices retreat.

I expect 2017 could be a tough year for iron ore miners, but a great one for these hot stocks. I hope they are in your portfolio now.

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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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