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Why Atlas Iron Limited and the iron ore miners are being crushed today

The worst performer on the All Ordinaries (Index: ^AXAO) (ASX: XAO) today has been the Atlas Iron Limited (ASX: AGO) share price with a 13% drop to 2 cents.

Unfortunately for shareholders of Atlas and fellow iron ore miners Fortescue Metals Group Limited (ASX: FMG), Mount Gibson Iron Limited (ASX: MGX), and Rio Tinto Limited (ASX: RIO), today’s decline is the result of the iron ore price weakening further.

According to Metal Bulletin the spot price of the benchmark 62% fines fell slightly overnight to US$74.38 a tonne.

This is the fourth consecutive session of declines, bringing the iron ore price to its lowest level since the end of November. Incredibly the spot price has now fallen by almost 22% from its February high of US$94.86 a tonne.

With Chinese futures lower overnight as well, I feel it is quite likely that prices will drift even lower during trade today.

What has caused the decline?

An inevitable drop in demand from Chinese steelmakers appears to be the most likely cause of the decline.

There have been warnings about iron ore inventories building up at ports for some time and finally it appears as though steel makers are doing something about it.

With inventories at reasonably high levels, I expect the drop in demand could weigh heavily on prices over the next few months. Especially with supply from Brazil and Australia set to increase this year.

So much so I wouldn’t be too surprised to see the spot iron ore price back around US$60 a tonne in the second-half of the year.

As a result, I think iron ore producers like Atlas and Fortescue could see their respective share prices decline further from here. So my advice would be to take profits if you own them and avoid them if you don’t.

At this point in time I think there are far better areas of the market to invest in such as the information technology and healthcare sectors.

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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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