Iron ore price hits 2-year high: Will the bubble burst in 2017?

Fortescue Metals Group Limited (ASX:FMG) has rocketed higher after iron ore hit a two-year high. But will the bubble burst soon?

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Mining giants BHP Billiton Limited (ASX: BHP), Fortescue Metals Group Limited (ASX: FMG), and Rio Tinto Limited (ASX: RIO) look set for another day of gains after the iron ore price rocketed to a two-year high.

According to Metal Bulletin the spot price for benchmark 62% fines closed 3.2% higher on Wednesday at US$82.25 a tonne. This latest jump brings the metal's annual gain now to a staggering 88.8%

Once again it appears that speculative trading from China is largely behind the latest move. Clearly the attempt by Chinese officials to curb speculative trading has been a failure.

This irrational exuberance is eerily similar to the Chinese share market bubble in 2015. During that year the Shanghai Composite index rose a massive 60% on nothing but smoke and mirrors. It wasn't long before the bubble burst and hundreds of thousands of people lost a lot of hard-earned money.

For this reason I would suggest investors keep away from iron ore. With the price being inflated on speculation, there's a fair chance the bubble will burst just like it did with the Shanghai Composite.

Considering the current demand and an expected increase in supply next year, I would place fair value somewhere in the region of US$50 to US$60 a tonne. That's between 27% and 39% lower than the current spot price.

I'm not alone with this view. A report in the Australian Financial Review reveals that global investment bank UBS has warned of a pullback in iron ore prices in 2017.

UBS has forecast for iron ore prices to fall to US$60 a tonne in the next six months, believing that a surplus will develop next year and inventories will pile up.

Fellow investment banks Barclays and Citigroup are also of the opinion that prices will fall. These two brokers are even more bearish than I am, and have forecast a drop to US$53 and US$48 a tonne respectively next year.

Whist speculative trading may take iron ore even higher over the coming weeks, eventually that bubble will burst. I wouldn't want to be holding iron ore shares when it happens.

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.

More on ⏸️ Investing

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Joining the revolution: How I'd invest in ASX AI shares right now

Advances in artificial intelligence (AI) could usher in a new industrial revolution. Here’s how you can invest in it.

Read more »

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »