For years, Australia's most lucrative export has been iron ore.
And iron ore's number one customer is China, which accounts for roughly two-thirds of the world's consumption.
Unfortunately the problem for iron ore miners is that China's demand for the metal is expected to slow, as it transitions from an infrastructure – to consumer-led economy. In February, Chinese house prices fell 5.7% year over year.
With slowing demand from China coupled with increasing supply from the world's biggest iron ore producers such as Rio Tinto Limited (ASX: RIO), BHP Billiton Limited (ASX: BHP) and Brazil's Vale, you can see why the recent falls in the iron ore spot price appear set to continue.
Iron ore price over prior 10 years. Source: Indexmundi.com
According to The Metal Bulletin, iron ore currently fetches around $US56.95 per tonne. A far cry from the glory days of 2011 when it fetched more than $US180 per tonne.
For many Australian miners, iron ore is their primary source of income. Rio Tinto derives nearly 50% of its revenue from iron ore and more than 90% of its profit.
Therefore, although Rio shares look cheap on conventional valuation metrics, investors are advised to keep the stock on their watchlist but out of their portfolios!
