The tumbling iron ore price is once again acting as a drag on the overall share market as the commodity slumped to a new six-year low overnight.
Iron ore, which is a key steelmaking ingredient, hit a low of just US$58 a tonne, according to the Metal Bulletin, and has now sunk 11% in the last 11 trading days. Meanwhile, it has lost 57% of its value since the beginning of 2014.
The reason behind the heavy declines is strikingly simple. Although Chinese demand is slowing at a rapid clip, with the nation recently forecasting growth of just 7% this year, the world's largest miners continue to press on with their production targets, forcing excess supplies into an environment which simply does not need it.
While some of the world's higher cost miners may be forced from the market in the near future, the expansion from the likes of BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) will likely more than offset their closures. Unfortunately, this could see prices sink far below their current level – possibly forcing iron ore futures to breach the US$50 level this year.
That's what makes stocks such as BC Iron Limited (ASX: BCI) and Mount Gibson Iron Limited (ASX: MGX) such risky plays right now. Should the price fall that low, both of these companies will likely struggle to turn a profit which could see their share prices crumble. Even Fortescue Metals Group Limited (ASX: FMG) presents as a huge risk right now given its enormous debt load – it will only become more difficult to repay as the iron ore price drops.
For the day, Fortescue's shares have dropped 5.1%, while BC Iron and Mount Gibson Iron have fallen 7.4% and 4.4% respectively. Given the enormous level of risk facing the sector right now, investors would be advised to steer clear altogether and focus on some of the market's safer opportunities.
