For months, analysts have been predicting that the price tag on iron ore would diminish in the third quarter with the expectation that trading activity would fall as Chinese steel mills destocked their reserves as they moved into winter. However, many of those analysts are now questioning their predictions, with the commodity showing strong resilience around the US$140 per tonne level.
There had been strong signs of a slowing Chinese economy, and whilst miners such as BHP Billiton (ASX: BHP), Rio Tinto (ASX: RIO) and Fortescue Metals Group (ASX: FMG) continued to ramp up their production levels, it was predicted the supply would go into surplus. This would have a negative effect on the price of iron ore, and the companies' share prices would likely follow, as production would no longer be as profitable.
Furthermore, the commodity typically performs poorly during the third quarter, which led analysts to believe that the high prices would be temporary at best. However, Platypus Asset Management resources analyst Anna Kassianos said "It is possible that if China is doing well we can bypass that seasonal weakness, but it's hard to say at this point… At this point you've got to wait for some more Chinese data points… it's too early to call either way."
Regardless of which way the price goes, Australian miners have been heavily focused on reducing costs of production as they ramp up supplies. According to The Australian Financial Review, it generally costs the larger miners around $40 to $50 per tonne to produce the commodity. A report released by Credit Suisse last month also stated that most of the miners' major expansion projects would prove profitable with an iron price above US$90 per tonne.
Foolish takeaway
The share price of companies heavily involved in mining iron ore have benefited significantly from the recent resilience of the commodity. Fortescue has gained 54% since late June and Arrium (ASX: ARI) has soared 81%. Should iron ore remain steady, these companies could continue to see further gains, however, based on the volatility in the sector and its reliance on Chinese growth, they pose as very risky prospects. As such, it may be best to remain on the sidelines and wait for more certainty before making a decision.
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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.
