Look out below: Iron ore drops below US$140 a tonne

Price may be falling faster than expected

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published May 3, 2013 11:55 am AEST

You may not have noticed.

Amid two ripper results from ANZ Bank (ASX: ANZ) and Westpac Banking Corporation (ASX: WBC) this week, including higher dividends from ANZ and a special dividend from Westpac, no one appears to have noticed that the iron ore price has fallen below US$130 a tonne.

Overnight, the commodity shed US$4.50 to hit US$129.40 a metric tonne.

So much for Fortescue Metals Group (ASX: FMG) chief executive Nev Power's recent prediction that the price would hover around US$140 a tonne in the short term, because of low iron ore stocks. Mr power's prediction of prices above US$120 a tonne of the long term appears to be more accurate.

Both Rio Tinto (ASX: RIO) and BHP Billiton (ASX: BHP) have predicted lower prices, with analysts generally agreeing that long-term prices of around US$120 a tonne are most likely. Brazil's Vale, the world's second-largest mining company says it will be difficult for the price of iron ore to fall below US$110 a tonne, as high cost producers are forced from the market, and iron ore supply is cut.

Fortescue, Rio and BHP plan to add a combined 235 million tonnes of new production by 2015, despite demand from China, the world's largest steel maker and biggest consumer of iron ore, expected to taper off. Economics 101 says rising supply and falling demand means lower prices.

For Rio and Fortescue especially, falling iron ore prices will have a significant impact on their bottom lines, with Fortescue a pure-play iron ore miner and Rio's iron ore division contributing around 90% of its earnings in 2012. BHP is less exposed, with significant earnings from petroleum and coal and other base metals.

Foolish takeaway

While no-one has really noticed the falling iron ore price so far – if the price continues to slide, expect miners and the commodity price to become front and centre news. Resource stocks that have taken a pummelling in the last month or so, could see further falls in their share prices.

Limited oil supply and growing demand mean oil prices are likely to rise over time. Position yourself to profit from this trend — and get 3 more investment ideas right now! — with The Motley Fool's FREE research report, "3 Oil Stocks to Send Your Portfolio Gushing Higher".

More reading

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Motley Fool writer/analyst Mike King owns shares in BHP.

Automatic Renewal

By taking up this offer, you will also be enrolled in our auto-renewal program, which is our way of making your ongoing subscription easier by ensuring uninterrupted service. Don't worry, though – you're not locked in, and can cancel your auto-renewal at any time before each 'anniversary' date without question or penalty.