While energy investors are celebrating a surge in oil prices overnight, investors in another core commodity market are likely second-guessing their investment theses.
While iron ore topped US$80 a tonne for the first time in more than two years on Tuesday, the commodity has since slipped almost 11%. It fell 6.8% overnight to just US$72.08 a tonne, according to data from The Metal Bulletin, in what is the latest sign the recent rally is unsustainable.
In fact, according to The ABC, one analyst believes the current iron ore price could fall just as sharply as it has risen so far this year. In what will come a as a concern for investors in the space, analyst Peter Strachan said:
"I thought we were in a bubble $10 or $15 a tonne lower than we currently are so I've been wrong for the last $15 of rise."
He believes the commodity is headed for a sharp fall in the first quarter of the 2017 calendar year, " and how far (it will) go, I would think mid (US$40s), mid to high (US$40s) a tonne."
Strachan's comments were similar to those made by Nev Power, CEO of one of the country's biggest mining powers in Fortescue Metals Group Limited (ASX: FMG). He was recently quoted by The Australian Financial Review as saying he thinks the commodity will quickly return to "oscillating between $US$40 and $US60 a tonne".
A fall to US$60 a tonne would certainly weigh on the share prices of miners in the sector, while a decline to US$40 a tonne – which is more than 44% below today's level – would likely be devastating for investors in the sector.
That includes shareholders of companies such as BC Iron Limited (ASX: BCI), as well as major companies like BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO). Of course, companies across the sector have been focused on reducing costs throughout their businesses, which will help them weather the storm, but it won't make them immune.
Foolish takeaway
The resilient iron ore price has come as a surprise to many investors over the past 10 or so months. While some want to believe the good times can continue, it's also fair to argue that there hasn't been a permanent change in fundamentals supporting the rally. The commodity's price could fluctuate in the short-term, but investors who are exposed to the sector ought to reassess their positions to determine whether they are still comfortable holding them.
